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<DAILY TROUBLE>
Tuesday, July 13, 1999
Family Golf Centers Inc.
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Phone: 516-694-1666
Website: www.familygolf.com
Price (7/12/99): $8
HOW DID IT FIND TROUBLE?
Bye bye birdie. This once popular ace stock has landed in the rough.
The shares were already beginning to lose their solid footing when the company issued a large secondary offering last summer. However, Family Golf was still growing at the time, buying up independent driving ranges and expanding into ice skating rinks and family entertainment centers. The move was supposed to give the company some kind of seasonal stability. As the cold weather would drive golfers off the ranges, the enclosed rinks would draw them back in. While winter ice would never completely offset the summer greens, it was supposed to help smooth out the seasonal fluctuations.
The diversification sounded great in theory, but it didn't turn out that way in practice. In February, the company announced that sales and earnings for the December quarter would come in below expectations. This was supposed to be the payoff quarter -- the time when the SkateNations in the company's portfolio were supposed to make up for the golf range slowdowns. It didn't happen and, like a golf ball in a water hazard, Family Golf's shares sank quickly.
BUSINESS DESCRIPTION
New York-based Family Golf owns, operates, or has under construction 121 golf center locations in North America. True to the "Family" name, the centers offer other family diversions, including video games and miniature golf courses for the children, and even junior golf programs for toddlers as young as four. Meanwhile, the parents hit the lighted, and sometimes even seasonally heated, driving ranges.
The company also runs or manages 27 ice-skating rinks and entertainment centers.
FINANCIAL FACTS
Income Statement
12-month sales: $135.9 million
12-month income: $12.2 million*
12-month EPS: $0.52*
Profit Margin: 9.0%
Market Cap: $208.8 million
(*Excludes extraordinary items, and before accounting changes)
Balance Sheet
Cash: $7.1 million
Current Assets: $46.3 million
Current Liabilities: $22.6 million
Long-term Debt: $255.7 million
Ratios
Price-to-earnings: 15.4
Price-to-sales: 1.5
HOW COULD YOU HAVE SEEN IT COMING?
Last July the company completed a secondary offering of 4.6 million shares at $24.25 per share. Netting more than $100 million in the process should have been like winning 18 straight holes in a high-stakes skins game. But today's balance sheet, with just $7.1 million in cash, bears proof that the company's cash management over the past year has been a few strokes over par.
The company didn't throw the money away. After allocating a fourth of the take to pay off debts, it snapped back into acquisition mode. While the highly segmented driving range market was ripe for consolidation, it seems as if Family Golf was swallowing without giving itself enough time to chew. Even now, while the original locations show same-store sales improvement, the units acquired in last year's Eagle Quest Golf Centers deal continue to show negative comps.
In a tale of woe similar to auto dealer consolidator AutoNation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AN)") else Response.Write("(NYSE: AN)") end if %>, once the share price slips, acquisition deals break down. The selling party is no longer interested in accepting stock that has lost its momentum, and it's hard for the company to raise the funds through an equity offering for an all-cash deal when the stock is floundering.
WHERE TO FROM HERE?
While Family Golf has no intention of halting its acquisitive ways, the recent stock decline coupled with the draining of last summer's equity capital windfall has the company easing on the accelerator. It has to.
That is unfortunate since it is something Family Golf has done quite well in the past -- weakness at Eagle Quest notwithstanding. While the company commands just 5% of the total number of driving ranges stateside, it has done a wonderful job of maintaining and upgrading the facilities. Family Golf claims 29 of the Golf Range Association's "Top 100 Golf Ranges in America" rankings.
The analysts certainly seem more optimistic than the investing public this time. Wall Street is looking for the company to earn $0.78 a share this year and $1.04 next year.
Like recent Daily Trouble Noodle Kidoodle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NKID)") else Response.Write("(Nasdaq: NKID)") end if %> shows, despite the soaring stock market, there are still plenty of beaten-up companies with growth prospects trading for single-digit Y2K P/E ratios. Sometimes you just have to find them in the bunker.
--Rick Aristotle Munarriz ([email protected])
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