I think IPO for the Proquest unit is a matter of time...
Stock of the Day
Sep 23, 1999
Bell & Howell: The Picture Gets Clearer
by Glenn S. Curtis 9/23/99
Old-line firms can often find themselves stuck in a rut and have trouble re-gaining lost ground in a society where technological
obsolescence is punished. Take Bell & Howell (NYSE:BHW - news) for example, the company that made cameras and movie
projectors used in many homes before video became a mass market product.
The Bass Brothers helped take the company private in 1988. Then a few years later, it was reinvented into an electronic document storage and management entity.
Finally, the firm returned to the public markets with a 1995 initial public offering at $15.50 per share.
Since then, things have been going pretty well; the company has exceed Wall Street estimates for six quarters in a row. Perhaps it is this reason that the stock is
trading in the upper-end of its 12-month trading range. On Wednesday, shares closed at $33.13.
Even so, insiders are still buying the stock. In early August, William Oberndorf, a director, bought 155,000 shares at $26, raising his stake to 1.4 million shares. John
Scully, another outside director, bought 6,752 shares, lifting his position to 314,659 shares.
Open market purchases by insiders near 12-month highs is usually a good sign that the fundamentals are intact and that the company's future is bright.
But relative to some other information-technology firms, the stock is still inexpensive. The company trades at less than 0.9 times sales, 10 times cash flow, and 14
times estimated free cash flow. All the ratios are below the averages for the firms in Bell & Howell's sector.
But with earnings expected to rise, investors have a buying opportunity right before them. James Roemer, Bell & Howell's chief executive, has said the company "is
comfortable with street expectations of about $2 per share for the year."
For 2000, consensus estimates are calling for the company to earn $2.35 per share. The company is expected to grow its revenue from roughly $975 million in 1999
to $1.04 billion in 2000, indicating a top line growth rate of 6.7%.
Bell & Howell trades at 13.9 times 2000 estimates. This is at a discount to the anticipated earnings growth of 18.1%.
Third quarter results are tentatively scheduled for release on October 19, and Wall Street expects the company to earn $0.56 per share. Based upon guidance given
by the company, and its ability to exceed estimates over the past several quarters, we expect earnings to at least meet and possibly exceed these estimates.
To that end, the first quarter of 1999 was a good one, but the second quarter really shined. The company reported earnings of $0.46 per diluted share for the period
ended June 30. This is a 21% improvement over the same period last year. Sales jumped 9% to $240 million for the quarter.
For the first half of 1999, the company earned $0.70 per share, a 27% gain over the prior year. Sales through the first six months rose 8% to $457 million.
Sales of electronic parts catalogs to auto dealers like Toyota and Lexus helped drive the revenue, but the company has also been helped by the rapid growth of its
Internet services to the education market.
But what else is behind these numbers?
To best understand the new Bell & Howell, an investor must first break the company down into three business segments -- information access, mail and messaging
technologies and imaging. The information access segment collects, creates, organizes and distributes information to universities, schools, classrooms, libraries and
homes via the Internet.
The mail and messaging technologies segment develops and markets turnkey solutions that transform routine mailings such as statements and invoices into targeted
paper and electronic customer communications. Clients of this segment include financial institutions, telecommunications firms and insurance companies. This division
also makes the machine that loads the mailings into the envelope. The imaging segment scans documents and puts them into electronic format so that the data can be
used over a corporate intranet.
What are the growth opportunities going forward? Intangible Asset Report analyst, Steven Bregman thinks that Proquest, which essentially provides students and
other scholars with access to a database of periodicals and other research material, will be a big source of growth. To focus on the education market, the company
recently announced that it will combine the Proquest Internet service with Infonautics Corp.'s (NASDAQ:INFO - news) electronic library reference product and
market the bundled services to the K through 12 school market.
It's also likely that by the end of the year, the financial statements for the Internet business will be broken out separately in preparation for a partial spin-off.
Given the rapid growth in the Internet business for the K-12 market, it will likely be in need of a capital infusion down the road. According to Bregman the K-12
business, if brought public, "could add 25% easily to Bell & Howell's share price." He also notes that the joint venture with Infonautics "on a pro-forma basis did $20
million in sales and is growing at 100%. The entity could reach as many as 25 million students in 40,000 schools."
While an IPO cannot be guaranteed, one might assume that this is management's goal, and that shareholders would likely be best served by such an offering.
Donaldson Lufkin & Jenrette analyst Matt Nemer thinks that there could be further news regarding "possible acquisitions or business combinations in the future that
could help shareholder value and expand upon the number of individuals using the existing databases."
Another potential catalyst: The company just bought Motorcycleworld.com, an Internet service that provides motorcycle enthusiasts with a link to dealers. This
e-business initiative was announced two weeks ago, and Wall Street has not yet had much of a chance to digest what it could mean to Bell & Howell. Yet over the
long run, this site, with its fresh content, and interactive services as well a well-defined audience is poised to generate meaningful traffic.
Bell & Howell's revenue figure could get a boost from motorcycle dealers who pay for qualified leads generated through the Web site. More guidance regarding this
acquisition and its estimated traffic will likely be made available in late October, after the third quarter is released.
Ultimately, DLJ's Nemer considers the company more of an earnings story. He points out that while the potential of an IPO for the K-12 business could drive the
stock, the company's ability to keep delivering earnings each quarter will provide the foundation for continued price appreciation.
Bottom Line:
Bell & Howell is turning in consistent earnings growth and has the potential for a big upside if the K-12 business goes public. Insiders like this stock, and it is
apparent that the fundamentals are strong and that news flow regarding further acquisitions, as well as continued quarter over quarter earnings improvement will push
this stock to the next level. |
