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Handleman (HDL), a value stock pick of mine recently, is currently trading down 15%, after reporting only 68 cents in Net Income for F3Q06. Compared to the $.94 it made during the same quarter last year, this is unimpressive. They are still on track to possibly make the $1.30 on the year, however.

HDL bought about 500,000 shares back recently, too. This reduced the floating shares by approximately 2.4% - not too drastic, but it reiterates that the company believes its shares are undervalued.

In the report (summary), they noted that music sales were down 6.2% - although this number doesn't include services like iTunes. Services like iTunes epitomize Handleman's troubles -- people don't need to buy CDs at stores, so the business is shrinking, though revenue did grow slightly due to an acquisition.

The report was not optimistic for the company. Sales in their core business are down, and margins have been cut 3%. The picture isn't pretty, but perhaps deep value investors finally have Handlman at a price they want. Consider that the company should still produce near $1 in free cash flow while trading in the high $9 range today, and the $0.32 dividend is still being paid.

That being said, we should wait for today's dust to settle before moving in on this "cigar butt" value investment play. It is a dying business. I would expect selling to still have continued pressure on the stock, and since it only has 20 million shares floating, it could be a volatile one for a few days.

Update 2/28/06:
The following comment was left and I thought I would pull it out for you to read:

MONDAY MORNING QUARTERBACKING--WARNING SIGNS THAT WERE FLASHING:
#1-Revenues for the second quarter of fiscal 2006 improved prior to the year ago period because of ACQUISITIONS--NO ORGANIC GROWTH! #2. 48% of the increase in past revenue was attributable to a strengthening of local currencies. #3. LOST MAJOR CUSTOMER IN 2Q to a competitor. #4. Co. in current year was having trouble getting a HANDLE [no pun intended] ON COSTS: Direct product costs as a percentage of revenues was 82.1% for the second quarter ended October 29, 2005, compared to 79.8% for the second quarter ended October 30, 2004. #5. CFO SHOULD FOLLOW PROFITS-- Company was reporting positive operating profits -- bit cash flows were coming in USING CASH! #6--Just because company is buying back its own stock does not necessarily mean it's a good investment -- could be masking EPS weakness, for less shares outstanding = higher EPS!

Finally, I have followed HDL for 20 years [even when I was a retail broker for Merrill Lynch]. Company has always intrigued me --back then, I figured the company would benefit from switch to CDs from LPs... later, the switch from VHS to DVDs. Upcoming growth catalyst(s) UPGRADE to HD-DVD and/or BLUE-LASER DVDs???

Enjoy your musings!
David J Phillips, Publisher
www.10qdetective.blogspot.com

David gives us some great insights on HDL and what is going on. I still believe the market's reaction to this report is overreaction because, to me, the vast majority of this information was known before the earnings release (David would agree) -- with the exception being just how bad the margins in the business are, and that the declining trend is a continuing pattern. The Crave Entertainment acquisition is not helping this situation at all. I, however, am sticking by my belief that HDL is undervalued, but I won't be touching it for a little while until the dust settles.

The interesting piece David gives us is his speculation on HDL's potential market to grow in. I'm not so sure about it, though. Time will tell. I want to know why Handleman is losing customers. If any of you out there know off the top of your head, please leave a comment!

HDL 1-yr chart:

Source: Music Distributor Handleman: Value Play or All Washed Up? (HDL)