Mike,
I don't think the shift in one person's opinion took into account the latest earnings report. There are lots of analysts that follow Integrity. The Wall Street Journal. did a long article on them today in their Southeast Journal edition and they are far from pessimistic:
The Wall Street Journal -- April 29, 1998
SOUTHEAST JOURNAL
---
Heard in the Southeast:
Integrity May Lift Investor Spirits,
Whether or Not Gaylord Makes Bid
----
By Carrick Mollenkamp
Staff Reporter of The Wall Street Journal
Investors may soon find salvation in Integrity.
The Mobile, Ala.-based Christian music producer's
beaten-down stock has recently surged in heavy trading
amid speculation that Gaylord Entertainment will buy the
company. While Integrity and Gaylord decline to
comment, a Gaylord spokesman says the Nashville media
company is interested in expanding its Christian-music
business through acquisitions.
Integrity's stock has risen 66% in the past two weeks to
close at $2.66 yesterday. A year ago, it traded at $1.875; it
went public in 1994 at $9 a share.
But Integrity is more than just a takeover play, investors
and analysts argue. For one thing, its financial results are
improving. On Monday, it reported first-quarter net
income of $455,000, or eight cents a share, after being
expected to post at best break-even results. For the
year-earlier period, the company reported net income of
$184,000, or three cents a share.
Then there's the rising number of Americans in Christian
movements or huge nondenominational churches favoring
so-called praise-and-worship music, whose prayer-like
lyrics are addressed to God.
"They don't sell 'Beat your mom up and throw her out the
window' rap music," says Paul Sutherland, president of
Financial & Investment Management Group, based in
Maui, Hawaii, and Suttons Bay, Mich. The group began
buying Integrity in 1994, and now owns 125,000 shares.
Mr. Sutherland considered buying Gaylord's stock as a
play on the rising popularity of Christian music, "but it
seemed a little bit too pricey," he says. "Integrity is so
cheap."
Indeed, Integrity is trading at 20 times projected 1998
earnings of 15 cents a share, compared with Gaylord's 34
times a projected $1 in earnings.
Integrity's stock "deserves to be at $3 or $4 or $5"
regardless of speculation over a Gaylord takeover, says
Mr. Sutherland. In five to 10 years, he predicts, Integrity
will report annual earnings of 50 cents to $1 a share.
Integrity was founded in 1987 by Michael Coleman, who is
the company's chief executive and controls 94% of its
voting-class stock. Its IPO, underwritten by
Nashville-based J.C. Bradford in July 1994, raised about
$18 million.
Mr. Sutherland says Integrity spent too much of the
proceeds expanding in areas such as gospel music, where it
hadn't done enough research. Additionally, the company
spent money to produce country music and new artists.
Costs also rose when Intergrity attempted to use a sales
force; it now distributes its products through a Gaylord
division, Word Entertainment.
"We just tried to do a lot of things at one time," says
Alison Richardson, senior vice president of finance. Lack
of focus cut revenue, which fell 16% in 1996 to $30.4
million.
Now, says Ms. Richardson, Integrity is "concentrating
more" on praise-and-worship music, "where we are the
market leader." For example, Integrity has curtailed
production of gospel music and untested singers.
That focus has begun to pay off. For 1997, the company
reported a 7% increase in revenue to $32.4 million. Net
income rebounded to $642,000, or 12 cents a basic share,
from a loss of $3.7 million, or the equivalent of 67 cents.
Two weeks ago, the cost cutting led analyst Michael
Kupinski of St. Louis-based A.G. Edwards to raise his
first-quarter earnings estimate to five cents a share. A year
earlier, he was projecting results running from break-even
to a two-cent loss for the quarter. "The pace of business
has improved not only for Integrity but the industry in
general," says Mr. Kupinski, who rates Integrity a
"maintain" or "hold."
Also boosting sales are groups such as the men's Christian
movement known as the Promise Keepers, and so-called
mega-churches, where praise-and-worship music is sung
while the lyrics appear on a big screen.
"Across the country, not simply in the South, but as you
would expect significantly in the South, the
praise-and-worship music is growing," says Bill Leonard,
dean of Wake Forest University's divinity school in
Winston-Salem, N.C. "It is part of a movement toward
what is called contemporary worship."
Integrity also has benefited indirectly from the broadening
appeal of Christian musicians such as Amy Grant and the
band Jars of Clay. Though neither is signed to Integrity,
both have helped popularize Christian pop music.
While Integrity has remained independent, other
Christian-music companies such as Nashville-based Word
Records & Music have been sold to much bigger
companies such as Gaylord and EMI Music of New York,
a division of London-based EMI Group. Gaylord, owner
of the Grand Ole Opry, indicated an interest in boosting
its Christian-music business after its 1997 sale of two
country-theme cable channels to CBS for a total of $1.55
billion. Gaylord's Word Entertainment division has a
stable of stars such as Ms. Grant and Sandi Patty, but it
has only a 4% share of the $82 million praise-and-worship
market, compared with Integrity's 48%, according to
SoundScan, which tracks retail music sales.
"In general terms, we are interested in growing that side of
our business through both internal growth and
acquisitions," says Gaylord spokesman Alan Hall, who
declines to name specific companies.
As for a Gaylord-Integrity merger, "It seems like there
might be some good synergy there," says Mr. Sutherland
of Financial & Investment Management. "If [Mr.
Coleman] thought that the best thing to do was sell out, I
am real confident he would do that."
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