The sweet music investors heard the other day was the sound of Steinway Musical Instruments
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.
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