Institutional Holdings
40.7% |
Industry
Industrial Machinery |
P/E to Industry
83.8 % |
Price/Book to Industry
94.2 % |
Profit Margin to Industry
155.6 % |
| Hirsch International is the largest single
source supplier to the embroidery industry. The company manufactures and distributes
computer controlled single-head and multi-head embroidery machines, and related products
and services including: application software, embroidery supplies and accessories, and
equipment leasing. Sales of new embroidery machines account for 72.9% of revenues Hirsch
has fallen on hard times since achieving record profits of $1.10 a share in fiscal
year 1997 (ended January 1997). The company's revenues grew to a record $152.48 million in
fiscal 1998, but profits began to deteriorate in that fiscal year's third quarter. In
1996-97 companies began to move their high volume production of embroidered goods to lower
cost Asian manufacturing plants. Hirsch, which had spent heavily to bolster its
infrastructure and U.S. sales force in anticipation of strong domestic growth, was faced
with a saturated market and a sharp fall off in demand for its larger model (six to thirty
head) embroidery machines.
A tough operating environment became even tougher for Hirsh and its shareholders in the
first three quarters of fiscal year 1999. The company's stock plummeted from a 52-week
high of $22.75 to a low of $2 as the apparel business softened and a stronger dollar/yen
exchange rate took their toll on revenues, margins, and profits. Revenues declined
15% during the first three quarters of the fiscal year. Third quarter revenues declined
20.8% to $29.5 million. Earnings per share for the latest 12 months declined to $0.21.
Demand for large multi-head embroidery machines continued to decline in the
third quarter, and the company "anticipates that market conditions will continue to
present a challenge". Selling, General, and Administrative costs rose 10.3% in
the first three quarters as the company spent heavily to build its infrastructure in a
belief that sales were ready to rise. Sales did not increase, and the company was
left with a bloated cost structure as revenues declined sharply. Inventories rose,
and Hirsch embarked on an aggressive inventory reduction program which bit even further
into profits. Despite the negative current operating environment, there are a
few bright spots and signs that a bottom has been reached and that management is beginning
to take the steps necessary to increase profitability.
The company has implemented a cost containment plan which is designed to bring the
company's infrastructure and cost base into alignment with the current reduced revenue
forecasts. Hirsch plans to consolidate its support and back office infrastructure in
an effort to cut overhead. In November, Hirsch appointed a new President and a new
Chief Operating Officer as part of its plan to focus on reducing expenses and
increasing profits. S,G,&A expenses, after rising during the first two quarters,
declined by nearly $1 million (5.5%) in the third quarter as a result of the first
cost cutting measures taken by Hirsch.
In addition to the cost cutting efforts undertaken, there have been other encouraging
signs. The company has remained profitable. Gross margins for the first nine months have
held steady with the prior year's. The slight decline in third quarter gross margins
(37.3% vs. 37.8%) resulted from an increase in the sale of lower margined used embroidery
machines. The sharp fall off in large machine sales has overshadowed the 20% growth
in sales of computer hardware and software,used machines, application software, embroidery
supplies, service, and parts. Demand for the company's small (1 to 6 head) machines has
held steady over the first three quarters. Leasing income has increased, with 45.2%
of equipment now leased (versus 34.4% last year). The cost of goods sold
decreased 19.4% in the third quarter. The fall in the dollar versus the yen will
also benefit the company's dollar denominated revenues.
We believe that the first steps have been taken to turn the company around and that
the shares are presently undervalued. The shares are trading on a Price/Sales
ratio of 0.36. Hirsch shares are trading for just 44% of their book value of $11.33
a share. The company has $1.48 a share in cash. Subtracting the cash position
from the shares current price, HRSH is trading on a cash adjusted fiscal 2000 (ending
January 2000) P/E ratio of 10.6. Debt levels are manageable, with a current ratio of
3.18 and interest coverage of 9.1x. We look for a gradual recovery to occur over the
next year and for the shares to trade back up to book value.
[Editor's note: HRSH has risen almost 60% since Monday.
We would use extreme caution when purchasing any shares which have risen this fast.
It is usually better to wait for the stock's price to correct before buying, or to enter
only a partial position. There is never a need to chase a stock. You do not lose
anything by waiting--if you miss a buying opportunity in one stock there are 9000 other
stocks which will present you with a buying opportunity at some point during the year].
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