Wednesday, January 14, 1998
Media Arts Group, Inc.
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Phone: 408-324-2020
Website: http://www.mediaarts.com
Price (1/13/98): $13 5/8
HOW DID IT DOUBLE?
When it comes to art, it is said there's no accounting for taste. That may be true, unless you're talking about an auction house selling millions of dollars worth of Picassos -- or Media Arts, pulling in nearly $60 million selling works by... Thomas Kinkade.
Kinkade may not be well-known around your house, but he is a household name, and Media Arts became a thirteen bagger over the last 15 months by focusing on making him one.
A while back, Media Arts had painted itself into a corner. Its stock had fallen from $7 a share early in 1995 to just over a dollar per share by October 1996 due to losses at its John Hine Limited British operations. That's when Media Arts decided to liquidate the Hine business, taking a $12.1 million after-tax charge, in order to focus on Kinkade's work, a new direct sales force, expense management, and retail expansion.
In no time, a once sketchy outfit has left investors with a new perspective thanks to quarter after quarter of double-digit same-store sales growth plus overall sales up 52% for the first half of FY98.
Ignoring the write-off charges from last year and a one-time gain of $0.06 per share for the FY98 second quarter, earnings per share for the first six months of FY98 were $0.31 versus $0.02 a year ago. The stock has been brushed up from $4 in August to a recent high of $17 3/8.
BUSINESS DESCRIPTION
Based in San Jose, California, Media Arts manufactures and sells Kinkade's lithographs and reproductions and home decorative products based on his artwork. Kinkade specializes in romantic, light-infused depictions of peaceful and inspiring English cottages, manor houses, landscapes, and Christmas scenes. (Check out his work at http://www.thomaskinkade.com/gallery/gallery.html).
Media Arts markets Kinkade as the "Painter of Light" and sells his art in collectable series under a tiered pricing format going from small framed gift print reproductions selling for $50 to $250 to Masters Edition canvas lithographs priced at $5,000 to $15,000.
Products are distributed through 3,000 gift and collectible retailers, 16 company-owned Thomas Kinkade Stores, 48 licensed Thomas Kinkade Signature Galleries, an 11,000 member collector's club, and the QVC cable channel.
The independently owned Signature Galleries have grown in number from 21 at the end of FY97, with another 22 expected to be added this fiscal year. Sales through QVC have more than doubled over the last two years, to $3.4 million in FY97. The company also has a licensing agreement with Hallmark Cards
Kinkade's book Simpler Times, published by Harvest House, was a bestseller in the Christian market and has led to a six book deal. Like his writing, his art reinforces the importance of God and family.
Business is strongest in the second and third quarters. On December 19, the company registered a 2.4 million share offering, with 1.5 million shares to be sold by Media Arts and the rest by current shareholders. Prior to the offering, insiders owned 65% of the stock. On December 19, the company also signed a long-term deal with Kinkade.
FINANCIAL FACTS
Income Statement
12-month sales: $57.4 million
12-month income: $6.7 million
12-month EPS: $0.61
Profit Margin: 11.6%
Market Cap: $154 million
Balance Sheet*
Cash: $5.2 million
Current Assets: $23 million
Current Liabilities: $12.9 million
Long-Term Debt: $4.2 million
(*Prior to the secondary)
Ratios
Price-to-earnings: 22.3
Price-to-sales: 2.7
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Looking for turnarounds among sub-$5 stocks can be a dangerous business. Still, as early as October 1996, when the company jettisoned John Hine, Media Arts appeared to have a profitable core business with sales exploding by 41%.
Results have steadily improved since then. First quarter numbers announced August 4 showed sales up 51%, same-store sales up 35%, and earnings per share improving to $0.12 from a year earlier loss of $0.06.
Perhaps the best way to have found this company and believed its improving story was to have run across Kinkade's art and seen its growing popularity firsthand.
WHERE TO FROM HERE?
There are no published earnings estimates for the company, though that may change since Hambrecht & Quist and Needham & Co. are underwriting the secondary. The roadshow to sell the offering will no doubt broaden the company's shareholder constituency even as it signals that the stock isn't the bargain it was six months ago.
Personally, Kinkade's work seems awfully sentimental to me, raising the question of exactly how large the market for his stuff is. Plus, it's always odd to hear of companies aiming to expand market share among people looking for a simpler, less materialistic life.
Even so, Media Arts' management team seems focused on building the Kinkade brand, expanding distribution channels, and managing costs. Gross profit margins for the first six months of FY98 rose to 67% from 61%, while selling and marketing expenses fell to 26% of revenues from 31% and general and administrative expenses fell to 19% of revenues from 24%. The secondary will provide money to pay down debt and finance expansion. The firm has now got a solid long-term deal with Kinkade, too.
Given the company's recent performance, the stock may still offer value at 20 times trailing earnings. That's especially true since a string of successful books from Kinkade would further enhance the marketability of his art. On the other hand, it's rare to build a lasting empire on just one brand and inherently risky to try. But some people don't think much of Picasso, either.
-- Louis Corrigan
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