Cover Story: THE BUSINESS WEEK 1000
...AND, IN THE BANTAMWEIGHT DIVISION...
What in the world is Broderbund Software Inc.? Thanks to its hit games--especially Where in the World is Carmen Sandiego?--a growing number of people know the answer to that question. And if sharp-eyed investors are right, the 15 other companies on the next page may likewise become a lot less obscure. They are the Little Giants of the BUSINESS WEEK 1000--public companies with sales of less than $150 million but with market values hefty enough to join the roster of America's most valuable companies.
Broderbund, based in Novato, Calif., is one of the most adept players in one of the hottest markets now going: educational and entertainment software. Carmen Sandiego, which teaches kids geography through the cartoon adventures of an international thief, is so popular that both Fox Broadcasting and PBS. have created television shows based on it. And Broderbund's interactive fantasy Myst has become the best-selling CD-ROM game in America. Such hits helped propel Broderbund's market value up 164%, to $1 billion in the year ended Feb. 28, despite last May's collapse of a planned merger with Electronic Arts Inc.
WILD RIDE. With a host of new titles due this fall--including a Dr. Seuss "living book" being produced in a joint venture with Random House Inc.--analysts expect even more. "This little software company has a huge following because it has a very consistent track record of developing superb games," says David T. Farina, an analyst at William Blair & Co. He predicts earnings will rise 95%, to $36.5 million by the end of fiscal 1996, on sales growth of 76%, to $195 million.
Another Little Giant, Centocor Inc., is a rare bird in the biotech industry: It has real products that are on or close to coming to market. The Malvern (Pa.) company is faring better than most rivals thanks to recent Food & Drug Administration approval of its ReoPro drug for heart patients, which it released last month. Its Panorex cancer drug is now selling in Germany and U.S. testing is underway. Analysts also credit a restructuring in 1992, after the FDA rejected a key drug. Few thought the company would survive, but new management refocused on manufacturing, cut costs, and farmed out sales and marketing to Eli Lilly & Co. and Wellcome PLC. Centocor now says it hopes to be profitable this year, although most analysts think 1996 is a more likely bet. CS First Boston Corp. analyst Jeffrey R. Swarz says revenues could soar 169%, to $181 million, by 1997.
DROPOUTS. Not all Little Giants are high-tech wizards. Credit Acceptance Corp. in Southfield, Mich., has discovered a lucrative low-end niche financing used-car purchases for high-risk buyers unable to get credit. Credit Acceptance charges interest rates well above the norm and acts as its own collection agency. And it has a unique relationship with dealers: They pay up-front fees to join the Credit Acceptance network, then receive stock options based on the number of buyers they refer to the company. It adds up to supercharged profits--$20.6 million net on $54 million in 1994 revenues. With Credit Acceptance rapidly expanding its dealer network, analyst Michael G. Milunovich of Robert W. Baird & Co, sees earnings doubling to $42 million in 1996.
Small fry make it to this list because the market expects great things of them. But the market is sometimes disappointed. A case in point: the wild ride taken by shareholders of Nextel Communications Inc., which has topped the list of Little Giants for three years running. Nextel first won investors' favor in 1992 with ambitious plans to build a nationwide cellular phone system. Nextel's market value on the 1993 BW 1000: $1.4 billion. The following year--after MCI Communications Corp. agreed to buy 17% of Nextel--its market value tripled, to $3.9 billion. But when technical problems and poor voice quality led MCI to back out last August, investors bailed as well. Though many think Nextel will eventually succeed, its market value plunged 68% in the 12 months ended Feb. 28, to $1.3 billion.
Nextel is not alone. Of this year's roster of 16 companies, 6 lost money in 1994. And 2 of last year's Little Giants fell off the BW 1000 altogether. On the other hand, 7 vaulted past the $150 million sales threshold. Proof, if ever it was needed, that high rewards and high risk go hand in hand.By Lori Bongiorno in New York