A Happy Tune at Singing Machines

This karaoke-machine maker's increasingly popular products have it humming along on steadily rising sales and earnings

By Gene Marcial

Watch for some positive sounds coming this week from Singing Machine (SMD ), the leading maker of consumer-oriented karaoke machines and related audio software. The company, one of the best performing enterprises last year in terms of earnings and stock performance, will issue its earnings guidance for the fiscal year ending Mar. 31, 2002.

Impressive as Singing Machine's sales and earnings have been in fiscal 2000 and 2001, this year's results are likely to please investors even more, according to close followers of the company.

In fiscal 2001, Singing Machine posted sales of $34.3 million (up from 2000's $19 million) and diluted earnings of 56 cents a share (up from 13 cents the year before). These are all adjusted for a three-for-two stock split, which became effective on Mar. 15, 2002. For fiscal 2002, Singing Machine is expected to forecast sales of about $65 million and diluted earnings of $1.06 a share. The company is also expected to issue guidance for fiscal 2003: Estimated sales of $115 million and diluted earnings of about $1.70.


  But some bulls are more optimistic: They think Singing Machines could exceed its own estimates for 2003. They figure its earnings will be within the range of $1.70 and $2.35.

On Oct. 8, 2001, Business Week's Inside Wall Street column featured Singing Machine, then trading at 6 a share (pre-split), as a potential market winner (see "Staying at Home -- with Karaoke?"). Since then, this American Stock Exchange-listed stock has surged to 24 a share (pre-split).

On a post-split basis, the stock has climbed from 4 a share on Sept. 21, 2001, to 18 on Mar. 19, 2002. At its curent price, the post-split stock is trading at 16 times estimated fiscal 2002 earnings.


  One New York money manager who has been buying shares argues that based on Singing Machine's fast earnings growth, the stock deserves a p-e multiple of at least 25 to 30. On a multiple of 25, the stock should trade at 26 a share, and on a 30 p-e it would be selling at 31. This pro was right on the money on his forecast cited last year in the Inside Wall Street column -- on both earnings and the stock-price target.

Singing Machine President John Klecha says the company's growth has been purely organic -- without the benefit of acquisitions. So, he assures that there's no question about its accounting of sales and earnings, and that the results are driven purely by the fast sales of its karakoke machines.

These include the stand-alone MTV STVG-700 that comes with a built-in seven-inch TV screen -- where the lyrics scroll in sync with the music. A line of CDs with popular MTV videos complements the karaoke device.


  Klecha says the company's latest machines, introduced in January at the Consumer Electronics Show in Las Vegas, should be even bigger sellers. To be launched in time for the Christmas holidays, they'll include video-recording capabilities. Current models are able to record only audio. The new high-end machine will also include DVD and MP3 capabilities, as well a keyboard, and guitar input.

A toy version of Singing Machine's karaoke device retails for about $29, and the machine with the 7-inch screen sells for $249 to $299. The new high-end version with a 13-inch color screen will sell for $300 and up, says Klecha.

One recent buyer of the stock is investment adviser Louis Navellier, editor and publisher of Louis Navellier's MPT Review. He has purchased about 30,000 shares of Singing Machine. "I am adding predominantly low-risk, defensive stocks to my model portfolios," says Navellier, that are "recession-resistant, achieve strong operating profits, and have much more reasonable p-e ratios than the overall stock market."


  Among the other stocks that Navellier added in February to his model portfolios: CBRL Group (CBRL ), which operates the Cracker Barrel Restaurants; Office Depot (ODP ), the specialty discount retailer; and Supervalu (SVU ), a food distribution company.

Singing Machine's Klecha says the company has started selling in London through a major distributor there, which will ultimately cover all of Europe. Right now, overseas represent only 2% of total sales, says Klecha. But he expects Europe to equal the U.S. market in size within the next five years.

In the meantime, the company continues to increase its existing mass-market accounts at such outlets as Best Buy, Target, Costco, Sam's Club, and Toys 'R' Us. With karaoke on a roll, Klecha expects Singing Machine to enjoy rapidly rising demand. Investors might also keep singing their way to the bank.

Marcial is BusinessWeek's Inside Wall Street columnist

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