bullrider: As the one who started this thread, I'll just say that the fundamentals look as good as ever. I think 1998 came in a touch above the $0.50 I suggested in the original post, and the company is heading for at least $0.75 - $0.80 for 1999. Internet business is taking off, which is great for margins, and HELO's biggest product line, telephone headsets, is undergoing the first major product upgrade in a few years, which I think should stimulate the replacement market, like when a software company offers a new generation of its product. The March quarter will be the first apples-to-apples sales comparison, with the sales growth rate no longer looking so anemic, which has been caused by the company's eliminating numerous low margin products from its line a year ago.
I think this could easily fetch 30 times earnings, or the mid-20's, some time this year. Unfortunately, HELO makes a lot of money, so people don't think of it as an internet stock, even though the internet is one of the main things driving its earnings growth. (See my initial post here, and the first few thereafter, in which I explain why.)
Internet stocks never make money, so people value them on sales -- even a modest three times sales would have the stock close to $50 this year.
If you have ever played around with valuation models, you know that the price to sales ratio should bear some relationship to a company's gross margins, and thus potential profitability. In other words, you don't want to pay a high multiple of sales for a supermarket chain, which will never bring down more than 1%-2% to the bottom line, while you might well pay a high multiple of sales for a drug company that, if sales are strong, can earn 20% margins after tax.
With its gross margins regularly running above 50% because of the proprietary nature of much of its product line, HELO is much more like a drug company, while the numerous outfits selling books, CDs, computer equipment, etc., over the internet are more like supermarket chains, since their gross margins are rarely more than 10%. Even if those companies' operating expenses were zero they could never earn more than 10% pretax, and we know that their operating expenses are huge.
Most of these commodity vendors are not much more than startups, so sales will grow a lot faster than what an established outfit such as HELO will experience. But what good are zooming sales if your chances of ever making much money on them are so slim? I feel more comfortable with a company like HELO where the top line growth is more modest, while the bottom line can grow 40%+ for many years, because of the impact of the internet on its operating margins. |
