More Margin Finds
by Louis Corrigan (TMF Seymor)
Atlanta, GA (Feb. 16, 1999) -- We're still in the middle of earnings season, so we've still got a lot of candidates on our Rising Margins screen.
First up, Cyrk (Nasdaq: CYRK), a small-cap that's in turnaround mode and is a lot cheaper than it first appears. Indeed, if the company can hit its FY99 earnings target, it's now trading at just 4 or 5 times this year's earnings.
Based in Massachusetts, Cyrk is the world's largest full-service promotional marketing company, responsible for McDonald's (NYSE: MCD) Happy Meals, promotional items for Philip Morris' (NYSE: MO) Marlboro brand, and the introduction of Beanie Babies merchandise. FY98 revenues shot up 36% to $758 million thanks to acquisitions in 1997 that made up for a substantial loss of business from Pepsi (NYSE: PEP). Excluding restructuring charges and a nonrecurring gain, earnings came in at $1.7 million, or $0.12 per share, versus $3.2 million, or $0.25 per share, last year.
That's not good, but the Q4 results showed real improvement. Sales increased 15% to $212 million, with operating profits soared to $3.2 million, or $0.19 per share, from $0.24 million, or just $0.02 per share last year. Gross margins in the quarter rose to 20.3% from 19.0% a year ago, while selling, general and administrative (SG&A) expenses declined to 17.5% of sales from 18.1%.
While the Fool snapshot paints a generally ugly picture, Cyrk is sitting on $80.8 million in cash and investments, or about $68 million net of long-term debt. With 16.2 million shares outstanding, it's got about $4.20 per share in cash. Back that out of the current market price of $6.25, and the company is really selling for just over $2 a share.
New CEO Patrick Brady expects a huge turnaround this year, with FY99 earnings in the $0.40 to $0.48 per share range, as business from major accounts later this year will make up for a Q1 loss. If that proves true, the stock is quite a bargain. The caveats are that Cyrk operates in a low-margin business and that it's incredibly dependent on a few major customers. All of that spells high risk.
Next up, Gemstar International (Nasdaq: GMST, formerly GMSTF), the company behind VCR Plus, which makes it easier for people to program their VCRs, and a leading provider of electronic TV program guides. Gemstar is a gem, an incredibly profitable company and one of the most interesting plays on our digital future, as I discussed in a Daily Double last fall.
Q3 revenues increased 36% to $41.5 million while EPS shot up 43% to $0.33 from $0.23 a year ago. That was two cents ahead of estimates. Year-to-date, revenues have increased 34% to $112.4 million as EPS has risen 118% to $0.85 per share. The Fool Snapshot reveals a company with a 56% return on equity (ROE), a stellar balance sheet, a 53% operating margin and 41.6% net margin. That's pretty much insane, and speaks to Gemstar's patent-protected position in the business it's creating.
At $62, Gemstar trades at 37 times the $1.69 consensus earnings estimate (range $1.55 to $1.90) for FY 2000, ending next March. That's in line with the long-term growth estimate. Yet if Gemstar can indeed become a kind of TV e-commerce portal with lots of high-margin ad revenues, the stock, now valued at $3.5 billion, is still cheap.
To give you some idea of Gemstar's reach, it's now suing cable set-top box makers General Instrument (NYSE: GIC) and Scientific Atlanta (NYSE: SFA) for patent infringement. The latter had filed an antitrust lawsuit against Gemstar. Pretty interesting stuff.
Next, we have Playtex (NYSE: PYX), a personal care products firm that's been diversifying its offerings so that it's not so dependent on the competitive feminine care market, where its Playtex tampons are a leading brand. Its recent acquisition of the popular Diaper Genie brand complements its infant offerings, which include Mr. Bubble, Wet Ones, and Binky pacifiers. It also owns household brands like Woolite.
The company's Q4 sales rose 40.4% to $156.8 million, thanks partly to acquisitions. EPS soared to $0.10 from $0.03. For the year, sales increased 34% to $669.6 million while EPS shot up 54% to $0.57. Excluding amortization charges, EPS for the full year rose 38% to $0.83.
While all of this is good news, Playtex still has a negative book value owing to $808 million in debt. That's why the Fool Snapshot shows a profitable business with some missing metrics. At $15, Playtex trades at 21 times the FY99 earnings estimate of $0.71, a premium to the 16% long-term growth projection.
So Playtex offers a mixed picture. The company is becoming more diversified, with a spate of top brands in five different business areas. And it's got an opportunity to leverage its infrastructure. Operating expenses as a percent of revenues have been dropping. Still, it's got a load of debt to service.
What's Wall Street think? Today, BancBoston Robertson Stephens initiated coverage with a "long-term attractive" rating due to the belief that Playtex will make some more acquisitions that will leverage its infrastructure and extend its product lineup.
Analyst Cynthia Hope Hatstadt said that Playtex now trades at 8.3 times her FY 2000 EBITDA (earnings before interest, taxes, depreciation and amortization) estimate of $193 million, low relative to its peers. She sees the stock trading in a $15 to $18 range unless or until the company makes a major acquisition. That sounds about right.
Finally, those interested in short stories might take a look at Safeskin (Nasdaq: SFSK), the manufacturer of specialty hospital gloves. While short interest keeps rising, the company continues to defy those betting against it.
Excluding a charge to relocate a production facility, Safeskin reported Q4 earnings of $0.27 per share, up 35% and in line with expectations, on a 27% jump in sales to $63.6 million. Part of that gain reflects a lower tax rate, but gross margins soared to 52%, flat with Q3 results but up sharply from 44% in the fourth quarter of 1997. Management said it expects another record year in 1999.
Short sellers are no doubt still interested in the high inventories and accounts receivable. I haven't had a chance to check out what that story looks like today, but an October look suggested these items weren't as troubling as they appeared to Salomon Smith Barney analyst Melissa Wilmoth. Since then, the stock has risen about 26%, or to where it was before Wilmoth cut her rating on the company.