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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Friday, February 24, 2006

Handleman gets a big haircut

Handleman, a value stock pick of mine recently, is currently trading down 15%, after reporting only 68 cents in Net Income for Q3. Compared to the $.94 it made during the same quarter last year, this is unimpressive. They are still on track to possibly make the $1.30 on the year, however.

HDL bought about 500,000 shares back recently, too. This reduced the floating shares by approximately 2.4% - not too drastic, but it reiterates that the company believes its shares are undervalued.

In the report (summary), they noted that music sales were down 6.2% - although this number doesn't include services like iTunes. Services like iTunes epitomize Handleman's troubles - people don't need to buy CD's at stores, so the business is shrinking, although revenue did grow slightly due to an acquisition.

The report was not optimistic for the company. Sales in their core business are down, and margins have been cut 3%. The picture isn't pretty, but perhaps deep value investors finally have Handlman at a price they want. Consider that the company should still produce near $1 in free cash flow while trading in the high $9 range today, and the $0.32 dividend is still being paid.

That being said, we should wait for today's dust to settle before moving in on this "cigar butt" value investment play. It is a dying business. I would expect selling to still have continued pressure on the stock, and since it only has 20 million shares floating, it could be a volatile one for a few days.


At February 25, 2006 9:57 PM, Blogger David J. Phillips said...

Good Luck w. your MBA--been there-done that. Highly recommend--when you get to electives--if offered that you take a course on financial statement analysis.
Back to HDL:

#1-Revenues for the second quarter of fiscal 2006 improved prior to the year ago period because of ACQUISITIONS--NO ORGANIC GROWTH! #2., 48% of the increase in past revenue was attributable to a strengthening of local currencies. #3--LOST MAJOR CUSTOMER IN 2Q to a competitor. #4--Co. in current year was having trouble getting a HANDLE [no pun intended]ON COSTS: Direct product costs as a percentage of revenues was 82.1% for the second quarter ended October 29, 2005, compared to 79.8% for the second quarter ended October 30, 2004. #5. CFFO SHOULD FOLLOW PROFITS-- Company was reporting positive operating profits--bit cash flows were coming in USING CASH! #6--Just because company is buying back its own stock does not necessarily mean its a good investment--could be masking EPS weakness, for less shares outstanding = higher EPS!

Finally-I have followed HDL for 20 years [even when i was a retail broker for Merrill Lynch. Company has always intrigued me--Back then--figured Company would benefit from switch to CDs from LPs...later-switch from VHS to DVDs. Upcoming GRowth catalyst(s) UPGRADE to HD-DVD and/or BLUE-LASER DVDs???

Enjoy your musings!
David J Phillips, Publisher

At February 26, 2006 8:32 AM, Blogger rvb1977 said...

Thanks David - for shedding some more light. MMQB is always easy

Actually, much of what you discussed I thought to be already priced into the stock. But, as we now know, there was more downside yet! What is your estimate of HDL's valuation?

At February 26, 2006 8:37 AM, Blogger rvb1977 said...

PS - we have financial statement analysis. Given my major, it's pretty much a requirement...


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