Lend An Ear To Plantronics

From Surf City -- that is, Santa Cruz, Calif. -- to Milan's fashion runways may as well be from Ohio to the moon. Yet that's how far a low-profile company called Plantronics (PLT ) recently leaped. In 1969 its headset carried Neil Armstrong's first words from the lunar surface. This summer in Milan, Plantronics put on a fashion show -- complete with pouty lips, swinging hips, and a Euro techno-beat -- to present its latest line of headsets. These combine a microphone and earphone with Bluetooth wireless links for cell phones and MP3 players. Who knew something Mr. Spock might wear could come off so sexy?

Getting consumers to see its in-your-ear electronics as fashion objects is a major challenge now facing Plantronics. In August it launched its first full-scale marketing campaign, targeted at wireless gadget-laden professionals. We have yet to know how the campaign fares. But impatience at the cost is one reason investors have been dumping Plantronics' shares. After nearly touching 48 last fall, the stock recently dipped below 27, a level unseen since October, 2003.

THAT'S WHERE I SPY an opportunity. The reasons: Wall Street myopia, along with my own weakness for a company with a solid record of sales, earnings, cash flow, a sound balance sheet, plus an expanding patent portfolio. In 1961, Plantronics got its start making headsets for airline pilots. It still makes units for aviation and government use -- but has added headsets for telephone call centers and cordless, mobile, and VoIP (Voice over Internet Protocol) phones. It also sells phones for the hearing-impaired and headsets for online computer gamers. Plantronics grew sharply in scale in August, when it closed a $165 million cash deal for Altec-Lansing Technologies, a veteran maker of high-end audio entertainment gear. With Altec-Lansing, sales this fiscal year, ending March, figure to rise almost to $700 million.

The clouds over Plantronics include the cost of -- and worries about -- the acquisition, the big new marketing outlays ($10 million over a little more than a year), plus investments in China. Capital spending usually is 3% to 4% of sales; this year, it's running some 10%. Wall Street sees fiscal 2006 net income sinking to $80 million or so, down from the $102 million Plantronics would have earned in 2005 if it had owned Altec-Lansing through the period.

Year-over-year profit comparisons, however, are set to start looking much better in fiscal 2007, Plantronics' Chief Financial Officer Barbara Scherer told me. "We see tremendous long-cycle opportunities," she added, noting that the company expects long-term sales and earnings growth of 12% to 16%. A reason underlying this hope is innovation: Since 2001, Plantronics' patent portfolio has more than doubled, to 111, including a dozen since last spring. One emerging market for Plantronics is VoIP phones, a field where it has focused in part via a marketing partnership with Internet peer-to-peer phone service Skype Technologies. Recently purchased by eBay (EBAY ), Skype has ties to Plantronics rivals Logitech International and Sennheiser, too. Plantronics also is intent on expanding sales of wireless headsets, such as those modeled in Milan, to businesses. It figures that if executives adopt wireless headsets, such as the Discovery 640 model that lists for $149.95 and can handle calls from a standard phone and a cell phone simultaneously, they'll bring them to the office, sowing more demand there.

Not all of Plantronics' initiatives will pay off. Yet it has a sturdy balance sheet, with more cash than debt. Plantronics pays a 20 cents annual dividend and in October announced a new share-buyback plan. With just three of nine analysts recommending the stock, according to Standard & Poor's (MHP ) Capital IQ unit, expectations are low. If, as the Street's consensus has it, Plantronics earns $1.99 a share in fiscal 2007, then its profit will have grown nearly 18%. But at 29, the stock is selling for less than 15 times those earnings. Do you hear that sexy techno-beat?

By Robert Barker

    Before it's here, it's on the Bloomberg Terminal.