Boring Portfolio Boring Buys LCSI
March 25, 1996

LCS Industries, Inc. (NASD: LCSI)
120 Brighton Road
Clifton, NJ 07012
Phone: (201) 778-5588

Closing Price, March 22, 1996: $25 (up 3/4)
Trade: Buy 200 shares, March 25, 1996


Have you ever been a member of a book or record club, bought anything from a catalog, or used a 1-800 number to order some schlock you saw advertised on TV? Have you ever received junk mail offering "the [YOUR NAME HERE] household a limited edition commemorative Elvis plate"--or something equally compelling? Have you ever raced from the shower to answer the phone only to discover a telemarketer at the other end asking why you haven't yet joined MCI's "Friends and Family" calling plan?

If you said yes to any of the above, then chances are that you've met LCS Industries. And chances are even better that your name, address, phone number, buying habits, demographics of the zip code in which you reside, and who knows what else are in one of LCS's databases.

At this point, you're probably wondering why anyone would want to buy shares of a junk mail/telemarketing/infomercial fulfillment outfit? I guess my reply is along the lines of "if you can't beat 'em, own 'em."

Two trends are undeniable in the retail industry: (1) tailoring one's marketing appeals to specific customer segments and (2) outsourcing operations wherever and whenever it makes sense. LCS is smack on top of both of those trends. Although I couldn't get the company to comment directly about it, my strong sense is that once MCI begins marketing its new internet access package, and as cable companies and other bandwidth access providers join in, LCS could see a lot of new business come its way.

LCS, incorporated in 1969, offers clients a broad range of direct-response marketing services, classified into three broad categories: fulfillment services, computer services, and list marketing services.

Fulfillment Services.

Major customers include book clubs, record clubs, and catalog companies. LCS processes and provides information on orders, shipments, billings, returns and credit criteria, receives and deposits customer payments and updates customer files, and responds to inquiries from club members. The Company also provides computer-generated reports which clients use to measure profitability and to evaluate their marketing efforts.

This division of LCS also handles leads or inquiries generated by clients' advertisements that require a mailed or 800-number customer response, including mailing fulfillment packages containing the client's literature or product.

The wholly-owned CRI subsidiary (acquired in 1993) provides fulfillment services to the catalog industry: maintaining clients' inventories, receiving customer orders and payments by mail and toll-free "800" numbers that are open 24/7/365, and subsequent shipping of the merchandise. CRI also handles returns and customer service inquiries and complaints. Various reports are provided to clients to enable them to evaluate their marketing efforts.

LCS's outbound telemarketing service offers business-to-business and business-to-consumer calling services to clients in the publishing, financial, telecommunications, and technology markets. Applications include direct sales, renewals, market research, and lead generation.

Computer Services

This division currently accounts for around 13% of total revenues. It helps communications companies both within and outside the U.S. reach specific audiences for the sale of goods and services by converting raw data on customer billings and control data into marketing tools. Last September, LCS entered into an agreement to build a marketing database for "a major non-U.S. communications company." Total expected revenues through June 1998: $40 million.

The computer services division also performs list maintenance functions, which involve processing, updating and storing mailing lists and other demographic information for clients' promotional and list rental activities. Mailing lists may be combined and enhanced with demographic information to form databases, which can be used as the basis of additional client promotions or marketed to other list users. The lists and databases maintained by LCS presently range in size from several thousand to approximately 23 million names.

LCS has been selected by the U.S. Postal Service as one of 23 licensees for its National Change of Address System. As part of this program to reduce the return rate of domestic mail, USPS furnishes licensees every two weeks with changes of address on all recent U.S. business and household moves. With these data, LCS is able to offer its clients mailing lists that reflect the most current address information, thereby increasing the cost-effectiveness of mailings.

List Marketing Services

Through its subsidiary, The SpeciaLISTS Ltd., LCS provides consumer list marketing services, including: recommending lists for specific mailing campaigns and securing names from various list owners for mailings; rental and promotion of proprietary and client-owned lists for direct-mail promotions; and creation of proprietary lists drawn from numerous sources, such as directories and attendance rosters. This division accounted for approximately 50% of total revenues over the past three fiscal years.

Company Operations

Sales have increased at a compounded average annual rate of 19% since 1992. For FY1995 (ended September) LCS's total sales increased 26% (to $78.9 million) principally as a result of a 61% increase in fulfillment services (due largely to increased activity by the CRI acquisition), an 11% increase in list marketing services and an 8% increase in computer services.

Net income for 1995 increased 360% compared to 1994 primarily as a result of the profitability of the catalog fulfillment operation, the increased revenues and improved profit margin of the continuity fulfillment operation, and the initial profit derived from the new marketing database contract.

For the quarter ending December 1995, LCSI made $0.49 per share, a cool 69% gain over the year-ago quarter's $0.29. Revenues were up 37%, to 25.7 million.

Years Ended Sept. 30, 1995    1994   1993   1992  1991
Sales              $78,863$62,690$53,002$46,786$42,475
Net income           6,329  1,375    626  1,326    732
Net Profit Margin(%) 8.0    2.2    1.2    2.8    1.7
Per share
Primary earnings     1.33    .32    .16    .37    .22
Fully diluted
 earnings            1.25    .32    .16    .37    .22
Weighted aver.
 # shares            5,050  4,307  3,847  3,560  3,370
Dividends per share   .066   .045   .08    -     ----

Quarterly earnings per share info is as follows:

       1Q      2Q       3Q       4Q   Year
FY95  .29     .33      .30      .41   1.33
                   (fully diluted = $1.25)
FY94  .09     .11      .00      .12    .32     
FY93  .07     .14      .06     -.10    .16

Debt is moderately high (due to recent acquisition activity) but manageable, with total debt ($30.8 million) at 55% of total assets ($55.5 million). Long-term debt is only $3.35 million, however. Cash generation has been strong, and cash flow positive.

Earnings for the quarter ending March 31, 1996 are expected to be reported on or about May 6, 1996.


The company paid a 10% stock dividend in January 1995. A two-for-one stock split occurred in October 1995. The stock was trading at around $5 last year about this time and has *quintupled* since then. Indeed, the stock has almost doubled in the past two months, with hardly anyone (except a few folks here in Fooldom) even noticing. The Oberweis investment service featured the stock recently, I'm told, as has BI Research.

Current estimate from the lone analyst surveyed by First Call is for EPS of $1.65 for the FY ending Sept 1996 (32% growth over FY95's $1.25). The current estimate for FY97 is $1.86. Both of these estimates have risen recently, and I fully expect further upward revisions. A recent EPS by an independent research outfit offered $1.75 as an EPS estimate for FY96. The stock also pays a nominal dividend.

Despite some insider selling recently into the explosive rise in share price, LCSI stock is still heavily owned by insiders. President and CEO Arnold Scheine owns 17.5% of the company, co-founder and Senior VP Marvin Cohen owns 12.4%, and Gerry King (President of CRI) holds 6.9%

There are approximately five million common shares of LCSI outstanding; given the high insider ownership, the "float" is about half that size. Average daily volume is 80,000 shares. Institutions own approximately 23% of outstanding shares.

IBD:  EPS = 95, Rel. Strength = 98
52 Week High:       $26.50 
52 Week Low:         $5.25 
Market Cap ($Mil):  106.44 
Yield:                0.32%
Beta:                 1.76 
ROE:                  28.7
Price/Earnings:       16.8
Price/Sales:           1.4
Price/Book:            4.8


For LCSI, per-share earnings of $1.75 or so look makeable for the FY ending this September. Last FY, LCSI made $1.25. That translates into 40% EPS growth. The single estimate in First Call for next fiscal year ($1.86) suggests more modest growth of 13%, but I frankly find that forecast to be overly pessimistic. Even using the First Call numbers, that still works out to 22% compounded annual growth, 1995-97.

All of which is to say that LCSI certainly deserves a multiple higher than the one it carries at present. My view is that a p/e in the high teens (which LCSI has carried in the past) is fair. At 18 X $1.75, plus the dividend, we're looking at $32 by mid-summer--or 28% growth achieved in four to six months. I'll take it.

Please bear in mind that even though LCS is in a boring business, the stock has been anything but sleepy. This one merits some monitoring; but the potential for very good gains more than justifies the risk, in my opinion.

--Greg Markus (MF Boring)