Making beautiful music
01 Feb 2005
Investors
who like the sound of a piano may want to tune in to QRS Music Technologies.
Please
read this first: Following is an independent investment commentary
and analysis from the Reuters.com investment channel expressing views
that are not connected with Reuters News.
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The
music industry has changed significantly over time. Years ago, the
only music heard was live music. Today, there are many ways to not
only enhance but also record music. Some companies become very specialized
in this field. Take, for instance, QRS Music Technologies (QRSM.OB),
which develops technology to turn any piano into a reproducing player
piano. But, it doesn't stop there. The company also sells piano rolls,
benches, lamps, and other supplies. And QRSM, a company in the Recreational
Products industry, recently registered on the Reuters
Select Growth screen for Relative Growth. It is, thus, a good
example of the companies that fit into this week's Reuters Select
Top Down Company Focus theme of Consumer-oriented stocks.
Growth,
Relatively Speaking
Before we get into the meat of
the screen, it is important to state that QRSM is a small company,
with low market capitalization (about $29 million) and little trading
volume. Further, QRSM is largely ignored by institutions, as only
1.44% of it is owned by institutions, versus the Industry average
of 54.65%. That said, let's move on to the screen.
The Relative Growth screen starts
off by requiring that a company's tax rate stand at 25% or higher.
The reason for this is that we try to sift out companies with unsustainably
low tax rates, because tax rates could correct to higher levels very
quickly, eroding earnings. One reason why tax rates could be so low
is because they are depressed by loss carry-forwards from prior years.
Once those carry-forwards expire, the tax rate will jump significantly.
QRSM's effective tax rate average
for the last five years is 33.94%, which increased to 38.57% in the
trailing twelve-month (TTM) time frame. By comparison, the Industry
average over the long haul is 34.22% and 32.50% more recently. Thus,
it is unlikely that QRSM's tax rate will drift higher.
The Relative Growth screen also
looks at revenue and earnings per share (EPS) figures. The screen
requires that a company's recent revenue growth exceed its longer-term
rate. Further, the EPS growth rate must exceed the revenue growth
rate.
QRSM's average rate of revenue
growth stands at 12.41% for the last five years, comfortably ahead
of the Industry norm of 10.59%. In the TTM time frame, the company's
revenue growth rate more than doubled to 26.20%, easily outpacing
the Industry's only-slightly-improved 12.11% advance.
The story is similar when looking
at the EPS growth comparisons, as QRSM has a significant relative
advantage over its peers. Over the last five years, the company's
annual EPS growth rate averaged 37.20%, overshadowing the Industry's
18.99% growth rate. Even though business conditions have improved
sufficiently over the TTM period to allow the rate of EPS growth to
accelerate to 27.72%, this still pales in comparison with the company's
85.71% improvement. This further supports QRSM's presence on the Relative
Growth screen.
Before you get all excited about
these stunning growth rates, remember that it is much easier for a
smaller company to post faster growth rates. And the company is quite
small. With TTM revenue of $19.88 million, QRSM ranks 55 out of 84
companies in the Recreational Products Industry. So, while its recent
growth rates are amazing, it will be very difficult for the company
to sustain them over the long term.
Still, the company is taking some
solid steps to continue its growth. One such initiative is geographic
expansion. The company opened its first international office, located
right outside Sidney, Australia, a little while back. More recently,
it announced plans to open an office in Hong Kong. The Hong Kong office
will be used to coordinate and supervise production of pianos and
technology products in the Far East. Further, the centralization of
distribution and sales efforts in the region should expedite the company's
growth in the region.
Speaking of expansion, it is important
to note that the company's balance sheet is relatively stronger than
the average of its peers. Specifically, QRSM's long-term debt to equity
ratio is 0.01, and its total debt to equity ratio is 0.03. By comparison,
the Industry averages are 0.23 and 0.33. With this in mind, we see
that QRSM should be able to easily tap the debt markets in management
decides to pursue this line of financing for future projects.
So far, we have seen that the
company is growing at a quick clip and that it is positioned for additional
expansion down the road. Now, let's consider its valuation. Since
there is no analyst currently providing earnings estimates, we can
only focus on valuation metrics based on past performance.
For starters, let's consider the
company's price-to-earnings (P/E), based on TTM EPS. At 19.87, it
is effectively in line with the Industry's average of 19.49. Not much
to see here, so let's move on over to P/Sales. Here we have something
of substance. There is a much greater divergence from the Industry
norm. At 1.48, the company's P/Sales valuation suggests that QRSM
is trading at a significant discount to the Industry average of 2.19.
But, when we consider P/Cash Flow (P/CF) and P/Free Cash Flow (P/FCF),
the story changes dramatically. The company's P/CF is 18.13, a significant
premium to the Industry's 15.82 level. Now, consider P/FCF, where
QRSM's level of 258.33 is far above the Industry's 27.38.
Well, if you don't like the valuation
picture, or you think the discount and premium changes are too volatile
to really tell you anything, then there is something else you might
want to focus on, and that's the stock's beta. Beta describes the
relationship between the stock and the overall stock market. A beta
of one indicates that the stock price changes in the same percentage
terms as the market. If the market goes up by 5%, then the stock goes
up by 5%. If the market goes down by 1%, then the stock goes down
by 1%. But, if a stock has a beta of -1.00, then it moves in the exact
opposite direction as the market. And, if a stock has a beta of zero,
then changes in the stock price are completely independent of the
market. With that in mind, the average beta of the Industry is 0.92,
meaning that the Industry moves pretty closely with the market. QRSM,
on the other hand, has a beta of -0.23, meaning that it really is
not tied too tightly to the market.
All told, QRSM may be worth consideration
by investors seeking exposure to the Recreational Products Industry
via a Growth play. It may also be worth consideration by those investors
wishing to diversify their portfolio away from the performance of
the broader stock market. As always, though, it is important to remember
that not every stock is equally well suited for each investor, and
individuals need to carefully weigh their own preferences and tolerance
for risk when considering any investment opportunity.
