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Tuesday, November 04, 1997

Racing Champions Corp.
(Nasdaq: RACN)
Website: http://www.racingchamps.com
Phone: 630-790-3507
Price (11/3/97): $7 7/16

HOW DID IT FIND TROUBLE?

Like any good speedster, shares of Racing Champions got off to a fast start. The maker of die cast miniature race cars came public in June at $14 a share and took off past $18 a month later. Then the engine gave out and the shares skidded to a grinding halt.

A look under the hood found a company that had once dominated a niche was now being threatened by the two largest toymakers. Toy giants MATTEL (NYSE: MAT) and HASBRO (Amex: HAS) have entered the collectible miniature car market and now Racing Champions, the company that has prided itself on selling more cars than Ford, General Motors, and Chrysler combined, has its work cut out for its managerial pit crew.

BUSINESS DESCRIPTION

Illinois-based Racing Champions derives 80% of its revenues from the sale of miniature NASCAR die cast replicas. Every fall the company signs deals with Nascar drivers. For the 1997 season the company had 90 drivers on its toy roster.

The company is also diversifying into related collectibles, like a line of pewter figurines based on Marvel Comics characters and Sports Illustrated athletes.

The products are sold in mass merchandisers like Wal-Mart, Toys R Us, and even Texaco.

FINANCIAL FACTS

Income Statement
12-month sales: $73.3 million
12-month income: $9.6 million
12-month EPS: $0.71
Profit Margin: 13.1%
Market Cap: $100.9 million

Balance Sheet*
Cash: $5.1 million
Current Assets: $15.9 million
Current Liabilities: $12.3 million
Long-term Debt: $21.2 million
(*As of June 30, 1997)

Ratios
Price-to-earnings: 10.5
Price-to-sales: 1.4

HOW COULD YOU HAVE SEEN IT COMING?

Investors mistook the caution flag for the checkered flag. With NASCAR's 50th anniversary pulling out all of the stops next year, it was easy to see that a company selling related memorabilia would be a winner.

Unfortunately, other toymakers saw the same lucrative niche to exploit and Hasbro and Mattel came in and began to sign away some of the top circuit drivers from the Racing Champions roster.

While having a history in the industry and rapport with the drivers should make the company a mainstay, it is not easy to dismiss well-financed entrants with significantly more toy store muscle. For enthusiastic investors, this stop has been the pits.

WHERE TO FROM HERE?

It is easy to say that one would not want to touch this stock with a 10-foot pole position, but I have to disagree. The competitive threat, while real, has been blown out of proportion and the company continues to roll right along. Sales did flatten out in the last quarter, but just as importantly, margins did not deteriorate as many would expect in a market with new players.

Meanwhile the 1998 list of drivers, despite the quick pens of Mattel and Hasbro, now finds 100 NASCAR stars on the Racing Champions roster, 10 more than this year. The popularity of racing will certainly not wane next year as NASCAR plans an advertising blitz to commemorate its golden anniversary.

Beyond the expanded car line, the company will also introduce Star Trek pewter figurines next year. Along with the sporting and comic book lines, the company is making headway to diversify into other collectible markets.

In a recent interview with Reuters, Vice President of Finance Curt Stoelting explained that the company was on the lookout for companies to acquire. "We really want to put a couple more legs on the stool," he said. "We don't want to be a racing company forever."

The words may sound ironic from a company that had gone public just three months ago under the Racing Champions moniker, but with the recent tumble in share price one has to wonder if the company now becomes the hunted rather than the hunter.

With its IPO-enriched balance sheet, the company is a profitable entity selling for a little more than book value and 9 times next year's earnings estimates of $0.86 a share. That makes the company an attractive takeover target for either Hasbro or the acquisition-happy Mattel, if not for another toymaker or collectible specialist.

Despite the recent soft quarter the earnings were in line with analyst projections. The order backlog at the end of the quarter was higher than it was in 1996. So if the future looks bright, why was the stock run off the road? The pessimists seem to have overreacted this time around. Despite the banged up chassis, the motor seems to be working fine -- with plenty of time to turn its troubled race into a nice finish come the checkered flag.

-Rick Aristotle Munarriz (tmfedible@aol.com)


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