Looking for a great Christmas story? Try tiny micro cap Action Products (NASDAQ:APII), the company that labels itself "the leading toy designer and manufacturer of educational and positive, non-violent branded toys for pre-school children through pre-teens."
In early December, the company was breathlessly announcing that "... although earlier guidance predicted a 40% gain, and later an 80% gain, we have seen an even sharper increase in late season orders this year." November sales were almost three times 2003 levels, and 2004 was going to be a record year.
On Dec. 21, the company issued a press release saying it was seeing a "December to remember." December sales were projected to be up more than 60%, which would have topped the company's record set in 2001.
Today, the company announced it expected December sales to be "at least 85% over" last year, and "The incoming order rate for future shipments and the release of twelve new products is producing strong preorders for the first quarter of 2005."
Wall Street is not ignoring this news. The stock is the largest percentage gainer on the Nasdaq -- it was up 82.7% at today's high of $5.28, which is also far above the previous 52-week high of $4.50 a share.
Before today's news, the stock was actually down almost 10% over the last 52 weeks. Why? Trailing 12-month sales were $7.8 million, and the company had a net debt (debt minus cash) of $1.5 million. Free cash flow over the last 12 months was a negative $500,000. Those were hardly encouraging numbers.
Investors seem to be overlooking, too, that there will be as many warrants outstanding as shares after Jan. 7. Those warrants, with an exercise price of $3 a share, will be in the money and certainly exercised within the first six months if the stock price stays close to where it is. That's a lot of dilution, although the company will benefit from the cash infusion the warrants will provide.
For now, Action Products is a great Christmas story. But it has yet to build the year-over-year toy franchises that characterize bigger toy companies. It also plans to grow through acquisition, which could be a big risk for such a small company.
For now, Action Products is an extremely speculative investment.
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Fool contributor W.D. Crotty does not own stock in any of the companies mentioned.
