A Tug Of War Over The Maker Of Dirt Devil

Shareholders of Royal Appliance Manufacturing are feeling less than confident these days. The stock has been beaten down to as low as 37 a share on May 15 from a high of 59 in February. An enormous tug-of-war is raging between the shorts and the longs. The Feshbach brothers have a major short position in Royal, insist some pros. So far, the shorts have the upper hand, but a snapback could well be in the making, with the stock edging up to 41 in recent days.

Royal's stock was hot when it first went public last Aug. 6 at 15 1/2 a share. The new issue zoomed to 35 in just a month. It kept on going until mid-February when the shorts, betting that this maker of vacuum cleaners wouldn't be able to sustain its fast rise, put pressure on the stock. Royal's loyal fans, spearheaded by Goldman Sachs analyst Dan Carasso, explains that a spate of rumors is hurting the stock.

POOR RATINGS. One rumor: An unnamed big customer had returned a shipment of defective Royal products worth $20 million. "Not true," counters Carasso, who says he had checked with management several times. What's true, he explains, is that Wal-Mart Stores had returned in the fourth quarter unsold Royal products worth $5 million to $10 million, which had been fully expensed in the fourth quarter of 1991. In fact, adds Carasso, "Wal-Mart, enthused by the success of Royal's Dirt Devil upright and hand vacuum cleaners, this year ordered three additional Royal products, including the new $99 upright vacs, which are off to a good start." Royal has shipped the new vacs to other major customers such as Kmart and Target. Carasso sees a sharp acceleration in earnings immediately following the June advertising blitz for the $99 vacs.

Another rumor that Carasso pooh-poohs: A consumer-products magazine will come out with the results of a survey of vacuum cleaners in which Royal did relatively poorly. He says this isn't news because certain Royal products in the past have been rated poorly in the magazine's surveys, but sales haven't been adversely affected.

One pro who has been shorting the stock, however, says that the intensifying competition in the business will "deliver a stunning blow to Royal." Rich Vasek, Royal's controller, says rivals haven't "had any significant impact on us, and we haven't seen any change in the competition."

Smith Barney analyst Joe Kozloff is also high on Royal. He figures that the new product alone could produce sales of $30 million in 1992 and $50 million to $100 million in 1993. Total sales in 1991 came to $273 million. Carasso, who expects Royal to earn $2.80 in 1992, vs. 1991's $2.17, believes the stock will hit 60 in 12 months. "Even at that price, Royal is cheap," he says, based on his 1993 estimate of $3.60 a share.

Before it's here, it's on the Bloomberg Terminal.