Steinway Keys on Band Orders (Fool Plate Special) November 5, 1999

An Investment Opinion

Steinway Keys on Band Orders

By Dave Marino-Nachison (TMF Braden)
November 5, 1999

Shares of well-known piano maker Steinway Musical Instruments (NYSE: LVB) tuned up a bit in the first half of 1999 after finding their way onto the playlists of many investors who liked the company's strong brand position, reliable earnings growth, and consumer acceptance not only in the piano business but in brass instruments and Ludwig brand drums.

Many probably also believed that the company was a bit oversold on worries about sales weakness in Asia, which have historically made up less than 10% of the company's sales.

But the stock peaked around $27 per share in June and has since fallen steadily to its lowest levels since 1997. Now it looks like the shareholders are due for further disappointment, as the company reported a somewhat murky outlook for full-year 1999 earnings while turning in third-quarter EPS of $0.37, up from $0.35 last year and in line with First Call's two-analyst consensus.

Third-quarter piano operations were strong: Domestic shipments were up 27% year-over-year while foreign shipments rose 7%. (1998's revenue breakdown was 61% U.S., 30% Europe, and the remaining 9% primarily coming from Asia.)

But there were problems at the Selmer band and orchestra instruments division; the company said a "fiercely competitive" market and delivery problems to both student and professional users hurt gross profits. Selmer, which accounted for about 44% of the company's third-quarter sales -- slightly more than the figure for all of 1998 -- stands to drive significant future growth with band orders currently 6% above year-ago levels. However, the company hasn't been able to hire and train employees quickly enough to keep pace.

As such, the company is looking for lower-than-normal band division gross margins through year-end, potentially pulling fourth-quarter earnings as much as a dime per share below last year's $0.49 mark. The fourth quarter is generally the company's key earnings period, and First Call's analyst consensus is $0.51. However, CEO Dana Messina is "confident that our full-year earnings will exceed the record results achieved in 1998." The stock fell more than 8% this morning nevertheless.

Is Steinway poised to generate more gains for patient bottom fishers? The company certainly thinks so as it recently moved to shore up its manufacturing process by buying leading U.S. piano plate manufacturer O.S. Kelly, a key supplier expected to generate annual sales of $5 million, for $3.2 million. (It bought German piano key maker Kluge in January, around the same time it bought back the Steinway Hall showroom in New York City 40 years after selling it.)

But investors still appear spooked not only by the near-term earnings outlook but a year-long theme of disappointing European business, even as Asian sales have picked back up. And investors will need to watch pages two and three carefully with the company's balance sheet increasingly long on debt and light on cash.

Steinway, though, appears to be in much the same shape -- financially, anyhow -- as it was earlier this year before the stock staged a rally. If the company can get its operations in order and continue to improve sales and margins amid stiff competition, an encore may be in order.

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