Well I must say that I am a bit disappointed by the SI response to my investment initiative so far..But the fundamentals are sound and things are going really well..In fact, Telettubies are starting to be recognized by the street! Here I post an article from the street.com just in case someone is reading this thing..!
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Top Stories: Teletubbies: Too Hot to
Handle
By Suzanne Kapner
Staff Reporter
6/1/98 3:14 PM ET
Investors looking to play what could potentially be the
hottest toy craze since Cabbage Patch dolls are turning to
Handleman (HDL:NYSE), which recently bought the North
American licensing rights to "Teletubbies" -- the British
television show that is causing a stir among preschoolers.
For the uninitiated, the four, lovable Teletubbies -- Tinky
Winky, Dipsy, Laa-Laa and Po --
are babylike creatures with
televisions in their tummies. Their
TV show, which debuted on PBS
in April, has unseated "Barney"
(thank goodness) in the No. 1 spot
for kids one and two years old.
Although many educators are
denouncing Teletubbies as
chewing gum for children's brains,
the controversy hasn't quelled a
rush for the alienlike cherub plush
dolls that are selling out of toy stores. Michael Goldstein,
chairman of Toys R Us (TOY:NYSE), described the product
launch, in a statement, as the most "successful since the
introduction of the Cabbage Patch dolls."
Rather than get into a bidding war with larger players like
Hasbro (HAS:NYSE), which won the licensing rights for
Teletubbies toys, Handleman bought a 75% stake in Itsy
Bitsy Entertainment, which owns the licensing rights for
North America. Now companies that want to manufacture
products like bedding or clothing under the Teletubbies
name must get permission from Handleman, which collects
a royalty fee on future sales.
Barry Sosnick, an analyst with Genesis Merchant Group
in New York who initiated Handleman with a buy in May,
estimates that licensing revenue from Teletubbies will add
close to 5 cents a share to Handleman's 1999 earnings,
which he estimates at 68 per share. (His firm hasn't
performed underwriting services for the company.)
Handleman, with $1.2 billion in revenue last year mainly from
sourcing music and videos for mass merchants, will report
its fourth quarter on Wednesday. First Call's survey of
analysts forecasts that Handleman will earn 7 cents per
share for the period, which would bring 1998 earnings to 34
cents per share, a 113% increase over the prior year's
per-share earnings of 16 cents.
But Sosnick, along with other analysts and money
managers, says Teletubbies is just one reason to buy the
Troy, Mich.-based company, which has wrenched itself out
of a revenue and earnings slump.
Trouble started in the mid-90s, when the music industry,
faced with overcapacity and declining margins, hit the skids.
As consumer electronic chains initiated a price war,
Handleman, which fills the racks at Wal-Mart (WMT:NYSE)
and Kmart (KM:NYSE) with the latest CDs, was forced to
cut prices to compete. Then Handleman's customers
decided to buy hit videos directly from entertainment
companies like Walt Disney (DIS:NYSE) rather than
outsourcing through Handleman. The result: By 1996
revenues had declined 8% to $1.1 billion and the company
showed an annual loss of 38 cents per share.
Sosnic says the loss of the hit video business, which
consists of new releases as opposed to older titles, was a
blessing in disguise. "It was a money-losing product leader,
with superthin margins," he says. Handleman still distributes
older movies like the original "Godzilla."
There's little risk that retailers will follow a similar route and
phase out Handleman from other product categories like
music, says Donald Smith, president of Donald Smith &
Co. in Paramus, N.J., which owned 1.5 million shares of
Handleman as of March 31, according to data tracker
Technimetrics. "Music is one of the few areas that retailers
outsource," he says, because the product is so diverse and
the trends change with lightning speed. "Big retailers don't
want to be in the position of predicting music fashion," Smith
says.
As the company retrenched, it closed 16 distribution centers
and has shaved more than $12 million in costs since 1996,
says Tom Oviatt, Handleman's vice president and treasurer.
The automation of its two existing distribution facilities
allowed the company to reduce inventories by $100 million,
he adds.
With music sales on a tear, up 7.4% industrywide and 14%
in mass merchants alone since Jan. 1, Handleman is in a
position to regain its footing. The company will use a portion
of the estimated $35 million in free cash flow generated by
H.E.R., its music and video division, to expand two other
businesses. North Coast Entertainment, which houses
proprietary licensing products like Teletubbies, and Madacy,
the music label that owns the rights to artists like Sir
Andrew Lloyd Webber, account for just 10% of sales, as
does the international division, which operates in Canada,
Argentina, Mexico and Brazil. Oviatt says he expects those
businesses to make up a combined 35% of Handleman's
revenue by the millennium.
Earlier this year, Handleman hired Michael Beauregard to
scout for possible acquisitions like the Itsy Bitsy deal. And
Oviatt says the company will continue building its presence
internationally. In Mexico alone the company has 20% of the
music market, he says.
Handleman also is developing a web site under the Madacy
name as well as constructing web pages for clients like
Ames Department Stores (AMES:Nasdaq). But Oviatt
says the Internet business remains tiny compared with the
company's other divisions. "Music on the Internet hasn't
gotten to be that big yet and ours doesn't show any sign of
getting big soon," he says.
With six consecutive quarters of improved profits behind it,
Handleman is poised to keep moving. The company has
repurchased 1.2 million shares out of a 2 million-share
buyback authority.
Sosnick's 12-month price target is 15, a 22% premium over
Friday's close of 12 1/4. Handleman is up 77% this year
compared with a 12% rise in the S&P 500 index. The stock
remains cheap, selling at 1.3 times book value, compared
with a market average of four times book.
"The Teletubbies concept can be huge," Smith, the investor,
says. "Combined with what's happening with music sales
and international expansion, the package is very attractive."
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