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Stock of the Day
Oct 21, 1999
Action Performance: Will Net Spinoff Help?
Action Performance: Will Net Spinoff Help?
senior analyst: Glenn S. Curtis 10/21/99
Let?s face it. Americans love to collect things. We?re pack rats; plain and simple. Bottle caps, beer cans, baseball cards ? it doesn?t matter; collecting is as American as Mom?s apple pie and auto racing, which is where Action Performance (NASDAQ:ACTN - news) comes in.
The maker of car replica collectibles, apparel and souvenirs that revolve around the motor sports industry has been successful at marketing its wares as the appeal of auto racing in the United States and abroad continues to grow.
At this time of year, however, with the auto racing season cooling down, and sports fans shifting their attention to the World Series and football, the stock has begun to sell off. But this happens almost every year.
For the past five years, the stock has been a perennial candidate for tax loss selling, with September and October being particularly weak due to concerns that the company might get caught up with obsolete inventory late in the year. However, with Christmas historically being a big time for collectible purchases, the demand typically picks up quick early in the next year.
This year, the sell-off has been sharper than usual. The stock was as high as $48.25 in late January, and as recently as June, it was trading for $40. But by Wednesday?s close, the shares were all the way down to $19.50, having fallen $0.28 on the day.
With the stock having fallen so far, Ryan, Beck Southeast Research analyst, Dennis McAlpine says, "Action is a good value. The company is certainly dependant upon the demand for racing collectibles. There is a question about just how much individuals are willing to spend on these items. In the meanwhile though, we would point to the potential offering of goracing.com as being a catalyst for the shares."
Goracing.com is an Internet site tailored to hardcore racing fans which is currently owned outright by Action. But the company is planning a partial spin-off through an initial public offering, although Action will maintain an 80% interest in the Goracing.com site.
Action plans to offer roughly 6.2 million shares at a price of between $7 and $9 per share in an offering led by Banc of America. Action's holdings in the stock will be in the form of 35 million class B shares.
What could an offering add to Action's stock price? With Action retaining 35 million shares of the stock at an average price of $8 per share, Advest analyst, Bret Jordan says the offering will add some value to the market cap although he?s not sure exactly how much.
In addition, the bankers and the company are uncertain about bringing the issue to market now, given the sell-off in Internet stocks that had plagued the market for more than a week prior to Wednesday?s rally.
Perhaps investors can?t expect the company to get a near-term lift from a goracing.com IPO, but there are other catalysts that could lift the shares.
One of them is a licensing deal with Hasbro (NYSE:HAS - news) , which will garner Action 6.5% of Hasbro?s sales of each product from Action's portfolio. This is a big deal, Jordan says.
"The Hasbro deal will generate about $5 to $7 million in profit in 1999 and is expected to grow 20% in 2000," Jordan says. ?The revenue is essentially pure profit for the company. We would look for the announcement of other, similar relationships in the future to help stimulate the top line.?
Insiders sure think that this is the time to be buying the stock. Since September, officers and directors have purchased 20,000 shares in the open market at prices ranging between $22.88 and $23.50 per share.
What makes the insider activity even more interesting is that some of the buying insiders were also sellers earlier in the year when the stock was trading in the $40 range. This indicates to us that management's timing is on the money. While an investment decision should not be made upon this fact alone, it sure is a good signal of good times ahead.
Action trades at 1.1 times sales, roughly 5.5 times earnings before interest, taxes, depreciation and amortization (EBITDA), and in the lower-end of its 12-month trading range.
The company also sports $53.2 million in cash on its balance sheet. This equates to $3.14 per share. Action also trades at just 2.1 times its $9.40 book value, and is kicking of some serious operational cash flow.
Wall Street estimates that the company earned $1.99 per share for the fiscal year ending September 1999. Consensus estimates have the company earning $2.62 per share in fiscal 2000 according to Zack's Investment Research. So, the stock trades at 7.3 times fiscal 2000 estimates.
Bottom Line:
The stock is an excellent value for long-term investors, and there?s a seasonal swing in the stock?s price. Every fall, it swoons, and it rebounds with the new year. As spring rolls around and the racing season starts to rev up again, we assume that the shares will kick into high gear, too. |
