The sweet music investors heard the other day was the sound of Steinway Musical Instruments (NYSE:LVB) reporting fourth-quarter sales growth of 13%, led by a surge in band instruments, particularly imported student-level pieces. The stock itself rose 13% in response.
Despite the images it conjures up of kids strapping on its better known grand pianos and marching in a parade, Steinway is a leading provider of all types of musical instruments. On the strength of its Conn-Selmer division, which sells Vincent Bach brass, Armstrong woodwind, Ludwig drums, and Scherl & Roth string instruments, Steinway's band segment sales leapt 21% to $41 million in the quarter. The piano segment, which includes its eponymous grands as well as Boston and Essex pianos, also recorded a 9% jump in sales to $65 million.
Apparently it's cool to be in the band again.
Though the stock symbol is somewhat ambiguous (it stands for Ludwig von Beethoven), the company's performance has been more straightforward: Steinway has been off-key lately with 2004 being something of a turnaround. Sales have been steadily increasing even as it has undergone a consolidation. By closing plants and retraining workers, production levels have been thrown off and margins have fallen under expectations, from 18% to 15% in band operations. They rose 400 basis points to 41% in the piano segment. On a GAAP basis, earnings were up 80% for the year, or $1.97 per share, though on an adjusted basis they were up 22% year over year.
In the piano market, Steinway is second only to privately held Baldwin Piano, which is owned by guitar maker Gibson, itself privately owned. With a 150-year history, the company has a dominating presence among symphony orchestras, where it is said some 98% of piano soloists prefer a Steinway.
As tough times befell the musical instrument industry, consolidation has been the tune called most often. Steinway is the result of a number of mergers over the years, including its Selmer division and fine instrument rival G. Leblanc, which it purchased for $36 million last year. GE Capital purchased Baldwin when it declared bankruptcy in 2001 before it was acquired by Gibson. Both compete against Yamaha (Pink Sheets: YAMCY.PK), the world's largest maker of musical instruments, and Japan, Korea, and China make up the world's largest piano market.
By most measurements, Steinway looks underpriced. It sports a trailing price-to-earnings multiple of 15 and a price-to-sales ratio of 0.60. Still, with significantly more debt than cash on the books and a spotty record of consistent earnings, Steinway could be considered a risky turnaround. It might need another season at band camp before it's ready for a curtain call.
Fool contributor Rich Duprey has no musical ability whatsoever, though his daughter is starting a band and plays Ludwig drums. He does not own any of the stocks mentioned in the article.
