October 29, 1997
Heard in New England:
Electronic Ventures Could Give
A.T. Cross a Renewed Lease on Life
----
By John Hechinger
Staff Reporter of The Wall Street Journal
Don't write off A.T. Cross.
The 151-year-old pen maker may be in sorry shape. Facing tough
competition at home and abroad, Cross's sales are slipping, and its profits
have faded from the page. In July, the Lincoln, R.I., company slashed its
quarterly dividend in half, to eight cents a share.
The company that once dominated the market with its signature slim, gold
pen has seen its shares drop to about $9 from their all-time high of $40 a
share in 1989.
But now, some bargain hunters are snapping up Cross shares. Heartened by
the company's efforts to revive its sagging sales -- including a new venture
to develop electronic Cross pens for use with personal computers -- they
are betting that Cross will turn itself around. What's more, Cross is flush
with cash and sitting on a valuable asset, an under-exploited brand name,
that could make it an attractive takeover candidate.
Stock pickers also note a rash of recent insider buying, including major
purchases by the Boss family, which has controlled the company for eight
decades. In all, managers and directors have bought more than 39,000
shares, in August and September, according to CDA/Investnet, a research
firm in Fort Lauderdale, Fla.
Doug Johnson, portfolio manager of Smith Barney Managed Growth Fund
in Bellevue, Wash., says his firm owns 628,000 shares, or 3.8% of the
company.
"There are 91 companies in our portfolio," he says. "Only four have more
upside potential" than Cross.
Mr. Johnson says that at Cross's current price, there's very little downside
risk. The new electronic-pen operation looks encouraging, and if
management can follow through with its recent efforts to cut costs, he sees a
major profit boost ahead.
In July, Cross cut back about 10% of its Lincoln work force of 900,
resulting in a third-quarter charge of $520,000, or three cents a share. After
the charge, Cross posted a loss of four cents a share, compared with net
income of 10 cents a share a year earlier. Sales for the quarter fell 9% to
$36.6 million.
It's a real comedown for the company that wrote the book on fine writing
instruments. In 1996, Cross still had about a third of the U.S. pen market,
according to Barrington Research Associates, a Chicago securities firm. But
the company's market share is eroding. Cross still leads in midrange pens.
But in the higher end -- pens selling for $100 and up -- the company has
lost out to brands such as Mont Blanc.
So, what went wrong? Cross acknowledges that it stuck too long with its
classic slim look, when retro-style fat fountain pens became popular and
models like the Mont Blanc Meisterstuck became must-have fashion
accessories.
"It's a common mistake successful companies make," says Harry Wells,
who heads the money-management group of Boston-based Adams,
Harkness & Hill. "They thought they had the perfect recipe. Why mess with
perfection?"
Now, Mr. Wells and others see promise in the company's new Pen
Computing Group. This year, Cross began marketing its "digital writers," a
line of electronic pens in a variety of styles that can replace the plastic
instruments sold with hand-held "personal digital assistants." The company
says the pens, which retail for anywhere from $12.50 to $250, write more
smoothly than the plastic versions.
In September, Cross began shipping its iPen, a $149 pen-like instrument
that replaces a mouse. And at a November computer trade show in Las
Vegas, Cross expects to unveil a computerized pen-and-notebook product
developed in a joint venture with International Business Machines. The
device is expected to go on sale next year and sell for about $400.
Cross, with 1996 sales of $179 million, anticipates the computer pens will
contribute $25 million to sales next year. But company officials declined to
say how much the initiative will add to earnings.
David Leibowitz, a managing director with Burnham Securities in New
York, sees the computer division as a big plus for Cross. In addition, he
says, the company has been expanding its stable of ink pens into the popular
wider styles. He is also pleased that Cross is offering a line of snazzy fashion
watches.
"Management has laid out a very ambitious program for Cross to emerge as
a much broader-based company than in the past," Mr. Leibowitz says.
He also points to the company's balance sheet as a bonus for investors.
Cross has no long-term debt, except for $5.7 million in life-time warranties
on Cross pens. And he notes that the company carries about $45 million in
cash, or nearly $3 a share.
Of course, shareholders may worry that Cross is getting too far away from
its core business with the new technology division. And even though the
majority of Cross's business is still good old-fashioned pens, that's hardly a
growth area. Last year, the industry's $300 million in U.S. sales represented
annual growth of just 3% to 5%, according to Barrington Research.
But at least one Cross fan isn't too concerned. Marc Ravitz, a vice president
with New York money manager Grace & White, says he has heard "rave
reviews" about the company's computer-pen products. Mr. Ravitz, whose
firm holds 227,500 Cross shares, an almost 2% stake, says he believes the
stock could double in three to five years.
And with Cross's "phenomenal brand recognition," he figures a large
consumer-products company would be more than happy to buy Cross if
things don't work out. For instance, he says, Cross could make a fine
addition to Boston-based Gillette's stable of pen products, including Parker
and Waterman.
"I can't believe the Boss family will let this company die," Mr. Ravitz says.
"They have too much at stake. If they can't turn it around, they'll sell it to
someone who can."
For its part, Gillette won't talk about specific acquisition plans. But a
company official is less than enthusiastic about Cross's new projects.
Electronic pens are "not an area we spend much time looking at," says
James Ricci, vice president of marketing for Gillette's stationery division.
"For us, ink is in our blood."
John Ruggieri, Cross's chief financial officer, says Cross isn't for sale.
Management is serious about building on its franchise through the new
electronic ventures. In July, he says, Cross hired a heavy-hitting outsider to
head the Pen Computing Group: an executive from Packard Bell NEC with
20 years of high-tech experience.
And Mr. Ruggieri believes the effort will pay off. He says he has been
hearing from an unusual number of investors, curious about Cross and its
new ventures. Says Mr. Ruggieri: "A lot of people are looking at the
company for the first time." |
