Fingerhut (FHT)
A "campaign" recommendation
Yep, the junk mail catalog company. I think they will become a major Internet play in 1999. They have been buying stakes in several Internet ventures the last few months and have announced their intention to continue doing so. They are planning on spinning off 2-3 of these Internet E-tailing companies in 1999 as IPO's. In addition, FHT has ties to many Internet commerce companies. For instance, the CEO of FHT was recently named to DRIV's Board of Directors.
Below is an article from thestreet.com which outlines many of the pros and cons of this company. Personally, I think it can possibly be the Internet sleeper of 1999. They are becoming a mini version of CMGI (creating an Internet holding company) while also operating a mail order company which sells at a mere 11 times last year's earnings. (They are carrying out the game plan Zapata said they were going to pursue, and then had a change of heart after the stock price went through the roof.) At a time when it is difficult to find any Internet companies not trading at obscenely high multiples this is one worth exploring. Anyone interested should do their own DD.
Top Stories: Investing in the Net Just Part of
Fingerhut's Growth Strategy
By Suzanne Kapner
Senior Writer
12/14/98 9:12 AM ET
Fingerhut (FHT:NYSE) today acquired a 20% equity interest in FreeShop,
an online shopping service, furthering its strategy of investing in Internet
companies.
Buying stakes in start-up Net companies with the intention of later selling
the holdings to the public is part of a three-pronged strategy to boost
growth at the 50-year-old Fingerhut.
Fingerhut's new president, William Lansing, is lighting a fire under the
Minneapolis-based direct marketing company, which also provides
financing for its low-income customers. Since joining the company in
May, the former General Electric (GE:NYSE) vice president and Prodigy
chief operating officer has been reshaping the company through
acquisitions.
"I've got 40 deals on my desk, which is way more than we can handle,"
Lansing said in an interview Friday. He expects to close more than 12
deals in the next year and a half.
His approach includes: consolidating the $60 billion catalog industry by
rolling up smaller players; investing in Internet start-ups, helping them
become big and profitable and then selling those investments to the
public; and building an Internet fulfillment business that handles
everything from building Web sites to processing orders for other
companies.
Lansing says those initiatives will help the company grow sales 26% to
$1.9 billion in 1999 from $1.5 billion this year. He's also promising to grow
earnings by at least 15% a year. A survey of analysts polled by First Call
expects Fingerhut to earn $1.05 per share this year, compared with 89
cents per share last year. That's not bad considering just two years ago the
company's earnings growth was declining.
At the time, bad debt from the company's low-income customer base was
causing it to write off a greater and greater part of its receivables as
uncollectable. Since then, Fingerhut has tightened its credit policies and
reduced mailings to its poorest customers, says Michael Millman, an
analyst with Salomon Smith Barney in New York. He rates Fingerhut a buy
with a 12-month target of 17 1/2, or a 35% premium to Friday's close of
13. (Salomon Smith Barney has performed underwriting for the company.)
"Fingerhut has become careful on how much credit it gives customers,"
Millman continues. "It's often turned down as much as 50% of orders
because of credit concerns." The analyst notes that Fingerhut's
delinquency rates have been declining to 22% of sales for its most recent
quarter, ended Sept. 25, compared with 25% a year ago.
A typical Fingerhut customer pays a 25% annual interest rate, which
reflects the credit risk, Lansing says.
Still, concerns persist. A recent court ruling found that Fingerhut had
misled consumers by charging them interest during a free 30-day trial
period. Fingerhut can appeal. A company spokeswoman says Fingerhut
doesn't comment on pending legislation.
Those issues haven't stopped Fingerhut shares from climbing in recent
weeks, mainly because of the company's acquisitions and Internet push.
Despite its 73% gain this year, compared with a 19% jump in the S&P
500, some investors say Fingerhut is still cheap.
Robert Niemeyer, an analyst with Philadelphia's Glenmede Trust, which
owns 400,000 shares, points out that Fingerhut is trading at 11 times next
year's expected earnings. "That still gives us a reason for buying the stock,"
he says.
In July, Fingerhut bought a 20% interest in the online PC Flowers and
Gifts. In August it bought cataloger Arizona Mail Order. Direct marketer
Popular Club joined the fold in November, and in December Fingerhut
unveiled a 20% stake in MountainZone.com, a Web site for mountain
sports information and merchandise.
Lansing says buying smaller catalogs allows him to cut costs by
eliminating back-office operations. At the same time, Fingerhut is
pumping investments into its Internet acquisitions -- providing these
start-ups with access to its 35 million-customer database, merchandising
expertise and order-processing services.
"We're an Internet incubator," he says, adding that Fingerhut will begin
selling these investments to the public next year.
Ken Cassar, an analyst with Jupiter Communications in New York, warns
that this strategy has its risks. "If they fund 10 Internet ventures, eight will
probably fail," he says. "Maybe two have the potential of making a lot of
money."
In addition, Fingerhut is moving more of its business to Web sites like
Fingerhut.com and Andy's Garage, which offers deals on a wide range of
products from bedding to cordless phones. Lansing says almost $100
million of Fingerhut's revenue will come from the Internet next year, up
from $30 million this year. That should make investors happy, since the
company saves $3 every time a customer places an order on the Net as
opposed to through its mail-order catalog.
Finally, Fingerhut is attempting to profit by setting up systems for
manufacturers that want to sell directly to consumers, and brick-and-mortar
retailers that want a presence on the Net without committing huge
amounts of resources. Kmart (KM:NYSE) and Wet Seal (WTSLA:Nasdaq)
are two of Fingerhut's more notable customers in this area.
"Fingerhut has a lot of infrastructure (not least of which is 3.5 million
square feet of warehouse space that's underutilized) that they can
leverage so the marginal cost to them to provide this service is minimal,"
says Cassar at Jupiter.
Lansing, who once headed McKinsey & Co.'s Internet practice and was
hired on the spot by GE Chairman Jack Welch after the two had breakfast,
could've written his own ticket during this fertile Internet boom. Why
Fingerhut?
"I saw a huge undervalued asset," he says.
Fingerhut investors, many of whom watched the bull market leave this
stock in the dust, are hoping that Lansing can unlock some of that
potential. |
