Five Minute Research: Handleman - cheap?

I ran across some blogs talking about Handleman Co. tonight, and after further review, I like what I see. . Handleman is a distributer of music to mass merchants - like Walmart in the US. Obviously, with the iPod and online music's popularity boom, it makes sense that this business is a tough one to be in. But let's look at the financials:

First off, the company has $1.25 per share in cash. That means a purchase of HDL at its current trading value of $11.43 is really like buying the company at $10.19.

So, is the rest of the company worth 10 bucks? First, let me state that the company can virtually pay off its bills for next year (current liabilities) with its accounts receivable. So that cash I mentioned earlier...well, it's real cash and not needed to pay the bills. That's good! I'd like to have that much cash in my personal checking account and NOT need it. (I might buy shares of HDL with it, actually)

The company is getting cheap because margins have been decreasing (23.9, 20.7, 20.5, 20.6, 19.4, 18.5 percent) in recent years (the last number is the trailing 12 month percentage). That's not a great gross margin percentage, and the net margin for Handleman is under 3% - again, not that impressive. I would expect that its '06 EPS should come in around $1.60, judging based on historical numbers, which would represent only 3% growth, while revenues should increase about the same. These are tough times for Handleman.

Looking at it in a simple way, though, the company trades at 8 times current EPS. That's cheap. Handleman is profitable, and will likely stay that way...even if pressure is on the business due to online music.

Finally, who agrees? Barclays certainly does. This gi-normous asset manager has increased its stake in the company from roughly 12% to 18% as of its 12-31-05 filing.

How much reward is there? Using a 3% growth rate in the DCF on ValuePro, the shares are worth $31. That's a nice margin of safety. HDL -> you can play in my portfolio anyday ... at least according to my five minutes of research. Time to increase minutes from five to a few more!

For a more extensive writeup, visit ValueInvestigator's writeup. He has $1.30 for an EPS estimate, which is probably a more informed number.

At any rate, let's watch HDL for the technicals to align, then we GO.