Magnetek faces bright future pending appeal of patent case.

Wanna make a bet?

A good subject might be embattled Magnetek Inc., a Chatsworth-based maker of digital power systems and controls.

According to Wes Cummins, an analyst with B. Riley & Co. Inc., the money-losing manufacturer whose shares are dawdling around $4, could be a long-term winner as it lowers production costs, sees rising demand for its products and moves into the fast-growing alternative energy sector.

But for Steve Smigie, an analyst with Raymond James & Associates Inc., all those positives don't offset one, enormous risk: a $23.4 million judgment against the company that Magnetek is appealing but ultimately may have to pay out.

"Right now they have a lot of money tied up in that case," said Smigie, who has labeled the company "underperform," the brokerage's lowest rating. A third analyst has a neutral rating on the stock.

Magnetek is a diversified maker of AC/DC power suppliers, power converters and controls for hoists and elevators. It hasn't recorded an annual profit since 2002. Then, last year, it took a big hit when it lost a patent infringement lawsuit filed by an inventor of electronic ballasts, critical parts for fluorescent lighting.

The judgment caused the company's shares to plunge 44 percent to nearly $2 since it was based on an arbitrator's decision and appeared final, raising the possibility of bankruptcy if Magnetek couldn't pay the big sum in 10 days.

However, the company arranged a long-term loan and a revolving credit facility to pay the amount and has since filed an appeal asserting the judgment was "fraudulently obtained." A judge has taken months to consider the fraud allegation, raising hopes by the company that it may yet prevail.

"This decision against Magnetek really blindsided a lot of us, (but) the longer it takes to finalize, the more inclined people are to assume the ruling will be overturned," said Cummins, who has a "buy" rating on the stock, but a target price of only $4.

Making moves

However, even though the company has arranged financing and will survive a loss, Cummins believes that the $24.3 million payout will crimp the company's growth efforts for several years.

Despite the losses, Magnetek's sales have been strong, it has moved to lower its costs and it has been moving into new markets.

"This is a good company with a great array of products. This stock will underperform its peers, but potential is there," Smigie said. "It's just going to take a while for them to turn the corner. There are some serious issues to deal with this year."

The company lost $1.7 million in the second quarter ended Jan. 1, compared to a rare $162,000 gain for the year-earlier period. It also saw its revenues decline 4.2 percent from one year earlier to $59.3 million.

At the same time, Magnetek has been trying hard to slash production costs in its embedded power regulator business, used in everything from appliances to data servers, by moving more jobs out of Europe to a cheaper manufacturing facility in Shen-Zen, China.

The move, however, triggered labor walkouts at the company's Florence, Italy, facility and delayed production. That cut into last quarter's profits and could hurt Magnetek's ability to meet mounting demand over the next two quarters, even if it provides long-term relief and stability, Cummins said.

The company is also hopeful that it can see long-term growth from the alternative energy sector. Some of its products like solar and wind-power inverters, which turn solar or wind-generated power into electricity, are state-of-the-art and some of the most efficient on the market. There is also a new regenerative drive product used to generate electricity from the energy created by elevators.

The entire sector is expected to get a boost by the California Public Utilities Commission which recently passed a $3.2 billion bill designed to boost alternative energy in the state. This sector only comprises less than 2 percent of the company's current revenue stream, so it's not expected to make much of a difference over the next year. However, the company has a history of remaking itself.

Remaking itself

Magnetek was established by buyout artist Andrew Galef in the mid 1980s after he acquired three divisions of Litton Industries that manufactured electric motors. Other companies were later added to the mix, including a series of acquisitions in 1999 and 2000 that helped it expand into the telecom and industrial controls markets.

About that time Galef sold off the slow-growing operations, including electric motors, and moved aggressively into faster growing AC/DC switches and battery chargers. However, the stock, which traded near $25 a share in 1997, has been on a downward trajectory since then, though it did have a brief run up during the tech boom.

Third quarter earnings are due out May 12, and few believe the company will turn in a great performance. However, should the company continue its move into solar and wind power inverters, it could be a long term play, Cummins believes.

"The alternative energy products have a lot of people excited. But everyone is kind of in a holding pattern to see how the rest of the year goes," be said.

ALLEN P. ROBERTS Jr.

Staff Reporter

MAGNETEK INC. (NYSE)

YEAR (July 3)                     2005     2004

Revenue (millions)              $242.4   $230.3
Total Expenses (millions)        238.3    230.8
Operating Income (thousands)     3,568    (582)
Net Income (millions)           (26.9)   (13.1)
Earnings Per Share             ($0.92)   (0.48)

SUMMARY

Business: Magnetek Inc.

Headquarters: Chatsworth

CEO: Thomas Boren

Market Cap: $116.36 billion

Dividend Yield: N/A

Total Liabilities: $75.5 billion

P/E Ratio: N/A

Long-Term Debt: $2.5 million