Cannondale Gears Up For Big Launch Brian Graney (TMF Panic)
August 19, 1999
High-performance aluminum bicycle maker Cannondale Corp. (Nasdaq: BIKE) continued to spin its wheels today after reporting a 45% drop in fiscal fourth quarter earnings per share (EPS) on a scant 2% year-over-year increase in revenues. Excluding an accounting change, the company turned in EPS of $0.11, down from last year's $0.20 but a penny ahead of the company's forecast in a warning announcement about the quarter last month. Perhaps in a Bronx cheer for the company's less-than-enviable ability to beat its own lowered estimate, Cannondale's stock rose a tad this morning. However, any positives to be drawn from the quarter were pretty much outweighed by the negatives.
As the company indicated last month, equipment problems at a manufacturing facility are resulting in unfilled orders, hindering Cannondale's ability to boost sales. Selling, general, and administrative (SG&A) and R&D expenses both rose at a faster pace than revenues during the period, causing operating margins to fall to 5.5% from an already anemic 5.7% last year. Worse yet, an 84% rise in interest expense due to a 39% year-over-year jump in long-term debt cut even more into the firm's profits. Ugh.
A financial bright spot during the period, however, was the company's inventory levels, which declined for the third straight quarter and now appear to be in check. This is good news, since a serious inventory balloon late last year and earlier this year had given many investors pause. Compared to a year ago, inventories are down 16% but remain 10% higher than the level reported at the end of 1997. That's not too bad, as that figure is in line with the 9% growth in year-end revenues over the same span.
Some of the inventory correction can be chalked up to the manufacturing problems that have hurt the launch of new Year 2000 products. Not surprisingly, it's hard to build finished goods inventory when you're having trouble actually making the products. More inventory breathing room has been created over the past few quarters as the company has pushed back production of its forthcoming MX400 motorcycle. Originally, the MX400 was set to be introduced this summer. But that production timetable was pushed back last month and again yesterday. If all goes well in the weeks ahead, Cannondale's factories will start spitting out MX400s in October with shipments commencing in November.
Hopes are running high that the motorcross bike -- the company's first -- will be the earnings and sales spark the company needs to return to its share-price-growth glory. Earlier this decade, the firm's stock appreciated at a 32% annualized rate between its IPO in late 1994 and the end of 1996. So far, indications are positive that the MX400 will be a hit, with dealer orders running 80% above expectations at one trade show earlier this year. More recently, the firm said it already has a "substantial" order backlog for the bike.
Whether the product will live up to the hype remains to be seen. But with Cannondale now trading at an 8% discount to its book value of $75 million and sporting a reasonable trailing P/E of 12.7 times fiscal 1999 earnings of $0.73 per share, the valuation seems as compelling as ever. Now is probably a good time for long-term investors who have been watching this stock from the bleachers to hop aboard this bike -- so long as they understand the many risks involved and can stomach what could end up being a bumpy ride.