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Research Report
Gentner Communications - Past problems create current opportunities
By Jon DeBry,
Last Update: 4:30 PM MT Dec 15, 1998
SALT LAKE CITY, Utah - In its ignoble past, Gentner Communications (NASDAQ: GTNR)
was involved with notorious bucket shop Hibbard Brown. Since then, Hibbard has been fined
$10 million and kicked out of the NASD for defrauding investors, while Gentner has
continued to grow.
Although Gentner isn’t one of the securities cited by the NASD as having been
manipulated by Hibbard, it’s likely that it was. It’s also likely that some
investors got their clocks cleaned by Gentner - a lesson they won't soon forget.
Usually, stocks manipulated in this fashion eventually crash and burn, but something
happened on the way to the pump-and-dump trash heap - Gentner developed solid products and
a good reputation in the industry. They actually made money on occasion.
Gentner and Hibbard Brown parted ways over five years ago (although the association
with Hibbard Brown continues to haunt Gentner on Internet message boards). For the first
three years after the separation, Gentner continued its erratic profit performance while
revenues continued to climb. The stock price continued to oscillate between 50 cents and
two dollars.
Two years ago, realizing that Gentner had potential as more than just a hyped-up penny
stock, new management was recruited. Fran Flood was brought in from Ernst and Young, first
as Vice President of Sales and Marketing, then as President, and now as CEO. Susie Strohm
was brought in from Newspaper Agency Corp as the new CFO. Kent Rogers was brought in from
Siemens to be the Director of Sales. Brooks Gibbs, the "father" of most Gentner
technology, remains with the company. The founder, Russell Gentner, sold his stake to a
member of the Board and left the company.
From "Family" to "Team"
Under Mr. Gentner’s leadership, the company had been a "family" type of
place - employees were kept around that may not have been pulling their share of the load.
The company produced lots of different products. It has been described as a
"tinkerer’s workshop". The emphasis was not on profitability.
Since Ms. Flood has taken over, she has changed the focus to a "team"
environment. Employees that aren’t pulling their weight are shown the door. Products
that aren’t profitable are terminated. The company has narrowed its focus to the
teleconferencing market and the remote facilities management market.
Local culture
Gentner is not your typical Utah company. The local culture is very paternalistic due
to the Mormon influence. In a lot of companies, women aren’t given a chance to show
what they can do. Gentner is different. The CEO and CFO are both women, as are 20 of the
33 employees listed on the "People Contacts" page of their web site. There are
plenty of talented working women in Utah, and Gentner will scoop up some of the best of
them.
Products
Gentner’s initial products were in the broadcast facilities market, including a
product that puts callers on the air on radio and TV talks shows. This product now has 60%
of its market, with clients such as CNN, WGN, and the major networks.
In 1991, the company expanded into teleconferencing, where they are regarded as one of
the top vendors of high-end equipment for installation in board rooms, hotel conference
rooms, court rooms, and other venues where high-quality audio is needed. Their latest
audioconferencing product, the AP800, has shown explosive growth since it was introduced
in the Spring of 1998. Gentner also makes products that monitor remote TV and radio
towers. The latest version of this product, the GSC3000, can report a problem by making a
telephone call to the technician and telling him what the problem is. The GSC3000 can fix
the problem itself, or the technician can key instructions into the phone.
Future growth
Gentner announced in September that they are developing a video conferencing product,
in partnership with RSI Systems (NASDAQ: RSIS). As with their audio conferencing product,
they intend it to be a high-end product sold into installations that need superior sound
and video quality. This is an explosive growth area with huge potential for Gentner, but
by entering this market, Gentner reduced its chances of partnering with a major
videoconferencing company.
Gentner also plans on broadening their tower-monitoring equipment to cover other types
of towers such as cellular towers. They are targeting 15% of revenues in this segment from
non-TV and radio towers this fiscal year.
Financial performance
Don’t go to sleep on me now! I’ll keep this short - Gentner’s revenues
have gone from $11.5 million in fiscal 1996 to $17 million in fiscal 1998. Profits have
gone from a loss in 1995 and 1997 to six straight profitable quarters. The September
quarter showed a remarkable $817,000 profit, compared to the usual profit or loss of a
couple of hundred thousand per quarter. Gentner is cash flow positive, they have paid down
their debt, they have reduced inventories at the same time that they have increased sales,
and they have been increasing their gross margins.
Employee stock participation
Ms. Flood owns 58 thousand shares, and Ms. Strohm owns 34 thousand shares, giving them
both a motivating stake in the company (Ms. Flood makes $120,000 per year, so the value of
her position, $170,000, is quite meaningful).
Gentner has an unusual employee stock option plan - the options don't vest unless the
company achieves its EPS goals. This aligns the employees interests with the
shareholders interests.
Why is the stock price and the P/E ratio so low?
The current trailing twelve month P/E is 13.5 (this is deceptively low - Gentner paid
no income taxes last year). The forward P/E, based on the low end of their earnings
estimate, is 16, for a company that you can reasonably expect to grow at 25+% for the next
few years. This would be undervalued in most any investor’s book.
Why is the P/E so low? Most investors won’t buy a $2 stock. Most of the time, they
won’t even know it exists because their screening software eliminates stocks below $5
or $10. The $2 price is a vestige of the Hibbard Brown days. If Gentner were to be brought
public today by a reputable underwriter, it would be priced in the standard $10-15 range
(I'm not relating this to the current price - I'm just saying Gentner would be priced
higher with fewer shares issued). Its financial performance would be in view of many more
investors, and it would probably command a higher P/E.
Also, Gentner is a microcap. Most mutual funds won’t bother with a stock that has
a market cap of $20 million. On the positive side, institutional investor
Watson Investment Management has taken a 5% stake in the company.
And, Gentner is a small company in a highly competitive market segment, and they have
shown a lot of earnings volatility in the past.
Finally, their reputation from the bad old days of Hibbard Brown has probably kept
Gentner down.
Projections for 1999
In a somewhat unusual tradition, Gentner makes annual profit projections at the start
of each fiscal year. Last year, they exceeded their annual projection by the third
quarter. This year, they project EPS of 18 to 23 cents per share.
They have already reported a nice first quarter of 6 cents, which leads me to believe
they will hit their estimates. If they do, and the continued strong performance can up
their P/E a bit, it’s not unrealistic to project a low-end stock price of $3.60 (P/E
of 20 times low estimate of 18 cents). If they hit the high end of their estimates and
their P/E expand to, say, 25, you could see a price of $5.75.
Risks
As mentioned earlier, Gentner is a miniscule company in a highly competitive
marketplace. Their fortunes could change quickly.
Small cap stocks are still out of favor, and may continue to underperform larger
issues.
Gentner is reliant on its key personnel, especially Ms. Flood and Mr. Gibbs.
Technical evaluation
Gentner is trading near its all-time high of $3, where it currently has considerable
resistance. There is support at $2.50, and then at $2.
Conclusion
Gentner still has a lot to prove, but if the positive quarters keep rolling in, the
stock price will reflect the improved track record <JD>.
Full Disclosure: I own stock in Gentner, as do most of my clients. I have not
been compensated in any way by Gentner.
This report is a "living" document. If you send me something
relevant to add, either good or bad, I will incorporate it into the report. Please
send comments or questions to jdebry@debry.com.
Download an Excel spreadsheet with Gentner's Income Statement and Balance Sheet here. |
