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Friday, December 12, 1997

The Singer Company N.V.
(NYSE: SEW)
Website: www.singer-nv.com
Phone: 905-475-8607
Price (12/11/97): $11 7/8

HOW DID IT FIND TROUBLE?

Shares of sewing machine giant Singer have come apart at the seams this year -- yet another sign that the automated stitching machines are nearing consumer obsolescence.

The short-term saving grace was always the emerging markets. There, where there isn't a dry cleaner that will perform alterations at the end of every block -- nor the financial muscle to absorb such a luxury -- the citizens simply rehem the garments themselves, or sew the clothes from scratch.

Singer was doing pretty well, too. Granted, revenues kept slipping, but earnings inched up a penny higher in each of the first two quarters this year as operating efficiencies offset the fact that sales were spinning off the spool.

So, despite the shortcomings, the stock rose as high as $24 1/2 over the summer. Investors were forgetting about the risks involved in investing in developing markets. When the Asian currency crises followed, shares of Singer were devalued in the process. Emerging markets can often be submerging markets.

BUSINESS DESCRIPTION

Singer's origin is a global patchwork. While the company operates out of Hong Kong, it is registered as a legal entity from the tax-friendly islands of the Netherlands Antilles. Semi-Tech, which owns a majority stake in the company, is based in Toronto, Canada.

The company is the undisputed leader in sewing machines. Singer also distributes consumer electronics equipment and home appliances through 1,500 retail outlets worldwide.

FINANCIAL FACTS

Income Statement
12-month sales: $1145.4 million
12-month income: $10.7 million
12-month EPS: $0.21
Profit Margin: 0.9%
Market Cap: $610.4 million

Balance Sheet
Cash: $153.3 million
Current Assets: $1069.5 billion
Current Liabilities: $609.9 million
Long-term Debt: $276.2 million

Ratios
Price-to-earnings: 56.5
Price-to-sales: 0.5

HOW COULD YOU HAVE SEEN IT COMING?

History gave investors a pair of warning signs to help pull away some of the shareholder euphoria that emerged over the summer. Pesos and buggy whips.

Three years earlier, with shares of Singer coasting in the high $30s, the Mexican peso was devalued. The reality may not have dawned on investors immediately, but the company's stock edged lower with every passing quarterly report. The aftershocks of the Latin American currency crisis remain to this day as the company continues to lose money in Mexico and is shuffling debt around in Brazil.

Then there are buggy whips, the popular anecdote of obsolescence. When motorized cars were introduced, those who made whips for horse drawn carriages eventually found new lines of work. In today's global marketplace the story would have played out a little differently. The buggy whip makers would have peddled to the developing countries, eventually setting up shop abroad to take advantage of the lower production costs.

Yet buggy whips don't sell all that briskly in the emerging markets anymore. Those countries, too, embraced the automobile -- or, for the less well-to-do, the bicycle. So, just because sewing machines are still popular in Singer's target markets, this might not always be the case.

WHERE TO FROM HERE?

The one thing to consider is that Singer is not wearing blinders as Wall Street lashes out at the company with its own buggy whips. Singer is trying to become a diversified home appliance company. The company recently sold off its U.S. furniture subsidiary and bought a German sewing competitor.

But if the company's strategy of fighting investor perception that Singer is synonymous with old-fashioned sewing machines proves futile, Singer is set on winning over the investment community with cost cutting.

Last week Singer announced a major restructuring under which the company will reduce its labor force by 28% and move manufacturing to lower-cost production centers. The company was already heading in that direction. In Brazil the company is closing shop and moving into the north of the country where the carnivals are quieter and the operating expenses are cheaper. Buying out Germany's PFAFF was another move designed to consolidate operations and capitalize on the economies of scale.

The new plan calls for moving production out of Germany altogether in favor of Eastern European nations like Russia. Lower cost. Higher risk. Will this be another history lesson waiting to repeat?

Investing was supposed to be easier than this. With Singer, picking a good brand name with a battered stock price is not enough. Now one has to balance the fiscal solvency and political climate of where the next shop will open. But, again, the stock is at its lows. The company did eventually dig itself out of the Mexican peso devaluation -- so this may pass, too. There is a pattern here and sewing buffs love patterns.

The question is, will the restructuring lead to a leaner company?

-Rick Aristotle Munarriz
(tmfedible@aol.com)


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