Sterling Investment Services

SMALL CAP RESEARCH REPORT
November 23rd, 1998

BUY RECOMMENDATION
Greg Manning Auctions, Inc. ‘GMAI’

Greg Manning Auctions, Inc.                           Ticker Symbol:  GMAI
775 Passiac Avenue                                             Shares Outstanding:  5.8 million (est)
West Caldwell, NJ. 07006                                     Estimated Float:  2 million shares
(973)-882-0004                                                    Current Price:  $11.50/share
www.gregmanning.com                                          Price Targets:  $21.75 & then $30.00
www.teletrade.com
Company Description:

This company is one of the world’s largest auction houses of specialty collectibles.  Among the items typically auctioned by the company they include stamps,  rare coins, diamonds, and sports memorabilia.  Greg Manning Auctions generates revenue from commissions charged on goods sold at the auctions it conducts.  The typical commission on an item auctioned is 15%,  charged to both the buyer and the seller.  This represents approximately 30% of the gross sales price.  In addition to this the company will privately purchase items for its own account for resale at its auctions.  This allows the company to shop for bargains that it can generate substantial profits on.  This is typically a higher profit margin  than a standard auction commission.  The company is in an ideal position to handle these transactions because as the auctioneer they are experts at knowing and understand the market for the items auctioned.

Greg Manning Auctions also acts as an escrow agency to insure the delivery of the auctioned goods and the proper receipt of funds.  This is included in the standard auction fees.  This in combination with the outside third party grading of many items greatly reduces the risk of fraud and helps improve customer satisfaction.  I feel this is a definite advantage that will give Greg Manning Auctions a competitive advantage over competing auction sites,  particularly as the company expands into the auctioning of other products.

Last year Greg Manning Auctions generated aggregate auction sales of $22.5 million dollars.

Last year the Spanish auction house Afinsa purchased 10% of the outstanding shares of Greg Manning Auctions.  They also purchased additional restricted shares to help fund the acquisition of Teletrade, Inc.

While the exact size of the auction market for the goods handled by Greg Manning Auctions is difficult to come by,  it is estimated that the domestic market is in the range of $5-10 billion dollars.  Additional information on the size of the stamp market can be obtained from Linn’s Stamp News,  www.linns.com
Recent Events:

Greg Manning Auctions recently acquired Teletrade, Inc.,  an auction house that specializes in the sale of professionally graded collectibles over the Internet and with telephone interfacing to the auctions.   Last year Teletrade had aggregate sales of $22 million dollars.  The added sales of Teletrade raise Greg Manning Auctions aggregate sales to slightly over $45 million dollars.  The current management of Teletrade has stayed on with Greg Manning Auctions.

This acquisition of Teletrade gives Greg Manning Auctions an additional mechanism to move inventory purchases more quickly.  In addition to this it brings a profitable operation under the ‘GMAI’ umbrella.  It helps create added exposure for the  company and gives them the ability to quickly create new auction markets.

Recently Afinsa agreed to provide Greg Manning Auctions goods on consignment to be auctioned in the United States.  These are Spanish and European collectible items that there is a greater demand for in the United States than there is Europe.  This agreement is for 5 years and is estimated to worth an additional $10 million dollars a year in sales.

In a recent CNBC interview Greg Manning stated that his company was in the process of looking for additional people with auction expertise in markets away from their traditional line of goods sold.  Successfully bringing these people into his organization would allow him to expand into new markets.
Growth Potential:

There is significant and substantial growth potential for Greg Manning Auctions to expand it business.  The recently added diamond auctions provides an excellent opportunity for the company to expand its auctions internationally.  The recent acquisition of Teletrade provides the platform for this international expansion.  While the market for collectibles and sports memorabilia is substantial in the domestic market,  there is an even larger market overseas.  The company is evaluating its options for bringing additional personnel into the company with the expertise to allow them to expand into new markets.  These potential markets include comic books, movie posters, and similar items.

The company intends to continue to concentrate on mid to high end items that command higher prices and better operating margins.  We also see substantial growth potential in the ability of the company to purchase inventory for its own account and to arrange consignment terms with dealers in order to obtain additional goods for its auctions.  In addition to this we believe the recent acquisition of Teletrade will make the company more attractive to potential sellers who are seeking a highly visible market for the items they are seeking to sell.

Comparables:

There are many auction companies through out the United Sates.   There are 3 other well known publicly traded Internet Auction sites with more planned for the future.  Most of these sites conduct continuous auctions on the Internet.  This basically amounts to an auction conducted by a computer.  The only real barrier to entry into this type of auction business is money and the time it takes to program a computer.  In practical terms there are no barriers to entry in starting an on-line auction business.  There are 2 publicly traded Internet Auction companies ONSALE, Inc. and eBay, Inc.,  with a third Internet Auction company to be brought public,  Ubid, Inc.  Currently the investing public has placed a very high valuation on these companies.

ONSALE, Inc. was one of the earliest entrants into the Internet Auction business.  To date has the highest sales of the publicly traded companies.  The company has yet to earn a profit,  so a valuation comparison based upon earnings is not possible.  In cases such as this a valuation based upon sales would be the next comparison.  ONSALE, Inc. currently has a market capitalization of $506 million dollars,  with $181 million in sales.  This translates into a multiple of 2.88 times sales.

eBay, Inc. is the most recent addition to the publicly Internet Auction companies.  The company is newer and smaller than ONSALE, Inc.  having generated on $30.5 million in sales.  eBay, Inc. has generated a small profit of $0.07/share.   The company currently has a phenomenal market capitalization of $5.79 Billion dollars.  This places a Price to Earnings multiple on the company of 2,052  In addition to this the company is trading at 190 times its sales.  WOW !!!!!!!!    This valuation is absurdly high!  If the sales of eBay, Inc. increased 1000% to $300 million in annual sales and the company earned an after tax net income of 10%,  this would generate $30 million in annual profits.  With 40.3 million shares outstanding eBay, Inc. would earn $0.74/share.  At the current market price of $143/share,  this would give the company’s shares of P/E multiple of approximately 200 times earnings.  This company does not have anything that would constitute a barrier to entry to keep the competition from attempting to obtain this firms customers and business.  The phenomenally high valuation being placed on eBay is already drawing competitors into this business.

Ubid, Inc. was formed by Creative Computers,  NASDAQ Ticker Symbol ‘MALL’.   Ubid, Inc. is one of the newest entrants into the Internet Auction business.  A check of its recent filings on the SEC Edgar system show the company only recently commenced operations.  The company has not yet come public through an IPO so exact financial data is difficult to come buy.  The lead underwriter for Ubid, Inc. is Merrill Lynch & Co.  It appears that they have initially priced Ubid, Inc. in a range that is more consistent with the valuation of ONSALE, Inc.  than eBay, Inc.

Our Analysis:

Our analysis of the Internet Auction industry leads us to believe that the current Internet Auction companies currently have no barriers to entry to protect their businesses from new competition.  In addition to this the small commissions charged and the lack of safe guards concerning the delivery of goods and payments raise some concerns over their long term business models.

We believe that Greg Manning Auctions has some barriers to entry that serve to protect its business from competition.  These barriers include the expertise that has been gained through the conducting physical auctions,  long term customer list and its reputation for high quality service.  The specialty nature of goods auctioned by Greg Manning Auctions limits its attraction to the competition.  We believe that Greg Manning Auctions will expand the scope of the products it currently conducts auctions for.
This will lead to increasing sales and profits.  The relationship with the Spanish auction house Afinsa is a positive one that we expect to continue to provide positive benefits to Greg Manning Auctions.  The recent acquisition of Teletrade should produce additional synergy’s and growth that will allow the profits of ‘GMAI’ to continue to accelerate.

The fact that Greg Manning Auctions acts as the escrow agency to ensure the payment and delivery of the goods auctioned through its auctions makes this company more attractive than the recent Internet Auction companies that require their customers to arrange for the shipping and payment of their orders.  If a customer were to auction 50 items through Greg Manning Auctions they would have to arrange 1 shipment to Greg Manning Auctions and they would receive 1 check from Greg Manning Auctions.  If the same customer were to auction the same 50 items on eBay for example they would have to arrange up to 50 different shipping orders and would have to arrange for up to 50 different payments to be received.

The recent acquisition of Teletrade, Inc. and the planned expansion into other markets leads us to believe that Greg Manning Auctions will see substantial growth in its sales and earnings.  We believe that the ultimate purpose of a business is to generate a profit.  It is our opinion that the business model,  from a profitability standpoint,  of Greg Manning Auctions is superior to that of the current group of Internet Auction companies that have recently came public and attracted substantial investor attention.  Based upon a comparison with the other publicly traded Internet Auction companies and the planned IPO of Ubid, Inc. we believe the shares of ‘GMAI’ are substantially undervalued at the present time and offer the potential for significant price appreciation.

While we currently believe that eBay, Inc. is very over valued in the current market place,  we do believe that ONSALE, Inc. and Ubid, Inc. do provide more realistic comparables.  The lack of across the board profits among our comparables makes a valuation comparison based upon earnings unreliable.  Looking at market capitalization versus sales does provide a more realistic valuation comparison.  ONSALE, Inc. is currently trading at 2.8 times sales,  and Ubid, Inc. is estimated to be brought public at an initial price of $12.00/share or 4.5 times sales.  With an estimated $45 million in combined sales this would place a price range on the shares of ‘GMAI’ at $21.75 to $34.91/share.
Our Recommendation:

We are recommending the purchase of shares in Greg Manning Auctions, Inc.,  NASDAQ Ticker Symbol ‘GMAI’ at the current market price.  We feel the shares provide the greatest value and greatest potential upside price appreciation among the Internet Auction companies.  We expect that a well managed company such as Greg Manning Auctions will continue to provide positive business developments to generate sustainable growth in sales and earnings.  In addition to this we would not be surprised to see additional positive research coverage of ‘GMAI’ initiated from larger brokerage firms,  which have largely remained on the sidelines concerning ‘GMAI’.  We believe the shares of ‘GMAI’ have substantial price appreciation from these levels.  We are looking for them to return to their previous high of $21.75/share.  If they are able to close above that price target then we would not be surprised to see them move towards $30/share in price.
Contact Information

For an investment releations package on the company please contact:  Greg Manning Auctions  (973) 882-0004

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