Guitar Center Strumming Harder

Guitar Center (GTRC ), where Willie Nelson, Mick Fleetwood, and Ozzy Osbourne shop for guitars and other instruments, has upped the volume: Its stock soared from 14 last summer to 23 on May 28. "It weathered the recession and the war in Iraq much better than other retailers," notes Robert Gardiner of Wasatch Advisors, which has shares in its $6 billion portfolio.

The largest retailer of guitars, amplifiers, keyboards, and percussion instruments, Guitar Center owns 113 stores in the U.S. It beat analysts' estimates when first-quarter earnings jumped 53%, to $5.3 million, or 22 cents a share, on a 13% rise in sales, to $287.5 million. Guitar's "big story" is the sizable earnings spurt Gardiner sees from operating margins that he expects "will grow dramatically." He figures it will earn $1.35 a share in 2003 and $1.75 in 2004. His 2004 number is higher than the consensus estimate. Guitar has lots of room to grow, he adds, as it opens up more stores and improves its cash flow.

Guitar Center has that "cool factor" working for it, says Sharon Zackfia of investment firm William Blair, which has done banking for the company. Its Hollywood (Calif.) store "is a landmark" for music pros because of its personal service. It has vintage instruments unavailable elsewhere, says Zackfia, who rates the stock "outperform." At 16 times her 2003 estimate, the stock is a "very compelling idea," she says.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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