Hanover : A Mail Order Bargain?

The catalog business is sizzling, and several Street pros are betting that Hanover Direct will catch fire before long. The company, formerly the famous automat chain of Horn & Hardart, sold its restaurant business in 1992 and has emerged as the nation's sixth-largest mail-order marketer. Sales are expected by some pros to hit $1 billion next year, up from 1994's projected $800 million.

Hanover's stock, which reached 77/8 in mid-March, has sagged to 51/8.. But some value investors have been buying in. "Hanover offers one of those rare opportunities where you can make three to four times your money in two or three years max," says investment manager Mark Boyar, who takes large positions in companies with shares selling below the intrinsic value of their assets. One such value-stock winner that Boyar caught early was Compaq Computer, which had traded as low as 27 a share in 1992; it's now at 118.

Boyar believes Hanover, which sent out 322 million catalogs last year, has a good shot at becoming the nation's leading direct-mail specialty retailer for one particular reason: It recently agreed to a joint venture with Sears Roebuck to produce catalogs for Sears' 23 million mail-order customers.

Together with Hanover's own 19 million customers, "this Sears-Hanover project will be a powerhouse in the catalog business," says Boyar. Hanover publishes 14 catalogs that offer more than 30,000 items in home furnishings, apparel, and general merchandise.

HEFTY DOWRY. Boyar sees much significance in the Sears-Hanover deal, which gives Sears an option to buy as many as 7 million Hanover shares at $10.57 apiece by 1998--provided the joint venture achieves certain sales and earnings levels. Boyar argues that the deal could lead to Sears' taking a sizable stake in Hanover once it proves it could be a leading force in direct-marketing--a business Sears abandoned. Including the sales from the Sears venture, Hanover could earn 30 cents a share next year up from 1994's estimated 19 cents, some analysts say. It made 17 cents in 1993.

With its market capitalization at roughly one-half of Hanover's projected 1995 revenues--"and with the company's excellent growth potential--Hanover is undervalued both as a growth and value stock," says Boyar.

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