Singing Machine SMD
March 16, 2001 - 8:50am EST by
2001 2002
Price: 5.20 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 0 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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A maker of karaoke equipment, SMD is a value play with strong growth prospects that has yet to show up on most value investors' radar screens because of a horrendous quarter ending 3/31/00 (a loss of 60 cents per share, though it projects break-even EPS in the quarter ending 3/31/01). Given the opportunities presented by its recently announced deal to create MTV karaoke products, its current market cap of under $30 million would appear quite low -- even if SMD were not a highly profitable company (earning $1.7 million in its most recent quarter).

SMD closed yesterday (3/15/01) at 5.20, which is roughly:
* 5.2X company-projected EPS of about $1.00 for the company's fiscal 2002 (which begins on 4/1/01),
* 300% of 12/31/00 tangible book value per diluted share, and
* 40% of fiscal 2002 company-projected revenues per diluted share (if one assumes that the average number of diluted shares outstanding will remain constant).

These ratios are extremely low in view of the company's strong historical growth record and exceptional prospects for continuing growth.

Given SMD's break-even expectations for the quarter ending 3/31/01 (its slow season), this implies EPS of $.69 for fiscal 2001. Thus, $1.00 in fiscal 2002 EPS would represent 44.9% growth, which is reasonable in light of:
* the 56% EPS increase in the nine months ended 12/31/00,
* a recently announced agreement to create a line of karaoke players and discs for MTV (which has been running a popular show called "Say What Karaoke"), and
* karaoke's growing popularity (see New York Times lead Arts and Leisure story of 2/25/01: "How Karaoke Conquered Broadway" for several thousand words on this subject -- e.g. "Two new musicals, and they may be harbingers of others, ingeniously incorporate the karaoke idea into the show itself: 'The Full Monty' .... and Broadway-bound London hit 'Mamma Mia!' ").

Unbelievably, SMD's PEG ratio (based on a P/E of 5.2 times 2002 earnings and EPS growth of 44.9% in 2002) is under 0.12!

Though SING is vulnerable to a variety of significant risks that could conceivably cause a plunge in its price (see its 10-QSB SEC filing for a list of them), I would be quite comfortable owning a highly diversified portfolio of stocks with similar characteristics. That is, it possesses a wide range of the attributes associated with superior returns (especially in the early months of an easing Fed):
* attractive valuation measures (low P/E, Price/Book Value, and Price/Sales ratios),
* projected returns on equity well in excess of 20% (for the year ending 3/31/01),
* heavy insider buying during the past 6 months, and, most importantly,
* several catalysts likely to drive up its price.
(As you may have guessed, I already own some SMD.)


3 catalysts:
1) Exposure arising from this spring's release and promotion of its MTV karaoke products.
2) A 12 month trailing P/E figure that is likely to fall precipitously when this quarter's earnings are reported (from 72.2X to 7.5X if we assume a constant stock price of 5.20) - bringing SMD to the attention of value investors who use screens based on 12 month trailing P/E's.
3) A series of quarterly run-ups if SMD meets its 44.9% EPS growth target for the fiscal year that begins 4/1/01.
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