Curious Math At Duracraft?

When Duracraft (DUCR) announced better-than-expected first-quarter earnings on Apr. 26, the stock of this major maker of home heaters and humidifiers should have shot up. Instead it slipped. Trading on Apr. 26 at 313/4, Duracraft is now at 30. Blame it on the "poor quality" of the reported earnings, says a New York money manager.

Despite the nice rise in earnings--48 cents a share from 44 cents--the "balance sheet says something quite different," notes Charles Biderman, editor and publisher of Market Trim Tabs in Santa Rosa, Calif. There are real questions, he says, as to how those numbers were derived. First, the inventories: They leaped 132%, to $41.3 million from $17.8 million. "We have no evidence of wrongdoing; but inventories soaring while gross margins seem unrealistically fat makes us wonder..." says Biderman. Inventories could hide costs that otherwise reduce income, says one analyst.

Also suspicious: The drop in reserves for questionable accounts receivables, by $1.6 milllion, which enabled the company to reduce expenses. "Had reserves stayed flat, earnings would have plunged 28 cents instead of rising to 48 cents," figures Biderman. Part of Duracraft's problem, he explains, is the jump in raw-material prices in China and Hong Kong, where most of the products are manufactured.

What happens next? Biderman says that because Duracraft's prices have not increased as fast as the raw-material prices, subsequent quarter profits "will have to be squeezed even more than they were in the first period."

Duracraft CFO Keith Seidman insists the earnings reported "accurately reflected" the first-quarter results. The inventory jump was due, he adds, to product returns caused by the mild winter. He concedes that the rise in raw material prices "will impact" 1995 results. Seidman sees gross margins rising back to 31% in 1995.

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