Monday, April 20, 1998
K-tel International
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Phone: 612-559-6888
Website: http://www.k-tel.com
Price (4/17/98): $28 11/16
HOW DID IT DOUBLE?
Sometimes stock surges can come from something as simple as a company going online. For years K-tel International lived in equity obscurity, a purveyor of pop music has-beens via direct marketing. But after the market close on April 9, the company announced its foray into electronic commerce with the launch of its K-tel Express website.
The stock was trading at $6 5/8 going into the long holiday weekend, but the shares doubled the next trading day -- and then doubled again.
For a company whose very name once brought up images of vinyl, the stock's popularity over the following week proved to be a gold record. It was a groove thing, baby.
BUSINESS DESCRIPTION
Yes, that's right, that K-tel. Growing up, wedged between late-night reruns of Green Acres and Gilligan's Island, the popular hit song compilations put out by K-tel were cheesy staples of televised advertising.
The K-tel TV spots that rattled off sound bites of selected cuts as titles flew by the screen were abridged pioneers to the infomercials that would come to canvas independent TV channels during the wee hours.
Through the years K-tel has obtained rights to 2500 hit singles from all genres. Packaging them by musical tastes, from oldies to romantic ballads, the company has grown -- especially overseas.
The launch of K-tel Express next month will naturally feature the company's signature hit collections, but will also offer more than 250,000 mainstream releases at discount prices.
FINANCIAL FACTS
Income Statement
12-month sales: $91.1 million
12-month income: $2.2 million
12-month EPS: $0.53
Profit Margin: 2.4%
Market Cap: $114.8 million
Balance Sheet
Cash: $4.3 million
Current Assets: $32.3 million
Current Liabilities: $24.7 million
Long-term Debt: $4 million
Ratios
Price-to-earnings: 54.1K
Price-to-sales: 1.3
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Who says the market is efficient and immediate? In early February, when the K-tel announced its fiscal second quarter results, the company spelled out its investment in developing its "online business." The notice fell on deaf ears, even as eventual competitors N2K <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTKI)") else Response.Write("(Nasdaq: NTKI)") end if %> and CD-Now <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDNW)") else Response.Write("(Nasdaq: CDNW)") end if %> found their shares racing higher with other Internet retailers.
Maybe it was the fact that K-tel was profitable. Maybe it was the fact that K-tel was, well, K-tel. As dated as Disco Duck or Convoy on today's airwaves, the fact that the company was gearing up for an online presence simply did not register.
Truth be told, even after the announcement and the long weekend, it still didn't sink in. When Monday morning found the shares trading just below $7, some may have questioned the contagiousness of the recent frenzy over Internet commerce stocks. Had the sector euphoria peaked?
Nope. Demand for K-tel shares surged over the course of the trading day, and bidders pumped up the volume and the share price. The fuel to K-Tel's fire was that it only had 3.9 million shares outstanding, and founder and CEO Philip Kives owned almost 3 million of them. That left a float of less than 30% remaining for the anxious investors and speculators to bid on.
The trading crescendo continued, peaking two days later when almost 8 million shares traded on Wednesday. That was the entire float exchanging hands over, and over, and over again.
Was this warranted simply because K-Tel would be a music merchant not only on your television but also on your computer? Logic or sans logic, it would have been easy pickings for those who had come across the company's quarterly report two months earlier.
WHERE TO FROM HERE?
Key West Securities, a market maker, issued a bearish take on K-tel a few days into the rise. "When the hysteria dies down and the volume dries up, the stock should settle to a more appropriate range between $5 and $7," the firm's chief analyst Anthony Elgindy noted. "This could happen very quickly based on earnings and book value."
The next day, after apparently taking into consideration how ill-placed that last remark was in light of the market valuations of the profitless CD-Now and N2K, Elgindy retraced his steps and retracted his words. K-Tel was now the "best value" among its competitors, and, despite the sector being overbought, Key West issued a "buy" rating with a $30-$50 price target. I did mention Key West was a market maker, right?
Well, swaying one analyst and a legion of new believers has been pretty easy. The bigger question is can the consumer be swayed? K-tel has a brand name, but the association of that name with a cutting edge Internet vendor is questionable -- and the company is behind the competition in Web presence.
Yet K-tel is taking a different if not more traditional path to winning over site surfers. Whereas N2K and CD-Now are quick to enter into million dollar marketing deals with popular Web search engines, K-tel will focus primarily on its existing customer database -- the core is not only mainstream, it is also international.
This is an interesting move since it will be targeting K-tel patrons who believed in the company before believing in K-tel was considered cool.
Along the way, the company's profitable non-online business, which earned $0.40 a share over the first half of fiscal 1998, may also cloud investors into thinking that the company is turning a profit on e-tail. If the perception that K-tel should trade at a similar price-to-sales multiple as CD-Now and N2K gets around, the stock could easily continue to rocket forward.
-Rick Aristotle Munarriz
([email protected])