K-Tel K-Takes Off Dave Marino-Nachison (TMF Braden)
November 3, 1999
Every so often, shares of entertainment and consumer products maker, marketer, and distributor K-Tel International Inc. (Nasdaq: KTEL) -- which traffics in music, videos, gifts, and auctions -- make a move that turns moon bounces green with envy.
Today was one of those days. The stock jumped more than 65% as of midafternoon -- nearly doubling early this morning -- after the company turned in first-quarter results for the period ended Sept. 30. Earnings per share were $0.30, which compares well to last year's $0.37 loss.
Great, right? Sure, if you're a K-Tel executive. "The fact is the company made a profit," CFO Steven Kahn said in a Bloomberg article, "and it's the first time in quite a few quarters." Six, actually.
That is a fact, but how important of a fact is it? After a $4.3 million gain from the sale of its Finnish subsidiary and a $600,000 expense for a stock repurchase in connection with a stockholder lawsuit, the numbers weren't nearly as pretty; K-Tel's operating loss for the quarter was $709,000, certainly better than last year's $3.2 million loss but hardly good reason for a sudden 65% boost in market value.
On top of that, revenues actually moved back slightly to $18.1 million. The company's gross margin improved year-over-year to 47.4% from 44.5%, and expenses decreased on a pure dollar basis. But that's not necessarily great news if a) sales aren't growing, and b) the company isn't trying to at least make noise in a viciously competitive online music market that includes Amazon.com (Nasdaq: AMZN) and CDNow (Nasdaq: CDNW).
And we aren't given a balance sheet or cash flow statement to work with, which makes gauging K-Tel's already questionable progress even more difficult. At the end of fiscal 1999 the company was bleeding cash, and that seems likely to have continued in the most recently completed three-month period, given the operating losses and the announcement of several marketing partnerships.
But considering the stock's trading history over the last year or so -- long periods of inactivity followed by flurries of hysteria coinciding generally with company announcements -- it doesn't appear that investors are too concerned with moving beyond the first few sentences of K-Tel's press releases anyway.
Those kinds of trading patterns don't really support this company as a long-term investment. (In what must be a Foolish first, we wrote both a Double and a Trouble on the company inside of two months last year.) Anyone considering K-Tel as a solid generator of returns and shareholder value should probably exercise the most extreme caution.
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