Prime Stock Advisory Letter
July 21st, 1999
STRONG BUY RECOMMENDATION
Greg Manning Auctions, Inc. ‘GMAI’
The following is a copy of a recent edition of the Sterling Investment Services’ Prime Stock Advisory Letter that covers Greg Manning Auctions ‘GMAI’. This report discusses the recent agreement with eBay, Inc. ‘EBAY’, which we believe to be very significant. Our previous report on Greg Manning Auctions ‘GMAI’ can be viewed at http://www.sterlinginvestments.com/gmai/feb22-99.html
July 21, 1999
Today’s Comments: The overall market moved sharply lower yesterday in a broad based sell off that effected almost every sector of the market I track. The cause of sell off, or the excused by the media to explain this sell off is rather elusive. No one seems to have a good feeling for what caused it, except that once the selling started every one jumped in. I believe the market has been showing some very short term weakness that other people have probably noticed as well. Combine this with the fact that most money managers are compensated by one of a few basic formulas that are all based upon performance and the very light trading volume we have been experiencing; once the selling started no one was simply willing to step up and start buying. This probably exaggerated what would have been a minor sell off on an average day of trading into something much larger on a very light trading day. It is also very important to realize that as of the close of trading on July 19th, the Dow Jones Industrial Average ‘INDU’ had posted an approximately 22% gain for the year to date. If you’re a money manager compensated on performance, and your returns are close to or better than the Dow Jones Industrial Average ‘INDU’ then you are probably more concerned about preserving your profits over the summer than you are about generating new ones. What that means for the rest of us who are not shooting for a target level on our bonuses, but instead own our portfolios and are concerned about total profits and return, is that these differences in compensation and management outlooks can create opportunities for those who do their homework.
YH: $28.50 YL: $1.19 EPS: $0.26 P/E: 74.2 Forecasted EPS: $0.50
Dividend: N/A Yield: N/A Ex Dividend: N/A
Price Target: Near Term $32.81 & $37.875 Longer Term $50+ Downside Stop: $17.625
Options Recommendation: None Available.
Company Description: GMAI is in the business of conducting auctions and private sales of collectibles, including rare stamps, coins, stamp collections and stocks, as well as other collectibles such as rare documents, sports memorabilia and trading cards. The company conducts auctions on the Internet through its Teletrade subsidiary.
Recent News: 7/19 Greg Manning Auctions ‘GMAI’ and Afinsa launch GMAI-EUROPE.COM
7/14 Greg Manning Auctions ‘GMAI’ to be a significant participant in new eBay, Inc. ‘EBAY’ venture.
6/24 Greg Manning Presents at the Merrill Lynch Asia Pacific Technology Conference.
6/10 Greg Manning Auctions launches GMAI-ASIA.COM and opens office in Beijing, China.
4/30 Greg Manning Auctions to sell gold coins over the Internet
4/22 Greg Manning Auctions ‘GMAI’ has record 3rd quarter sales and earnings.
4/7 Greg Manning Auctions ‘GMAI’ hires Gruntal & Co. to explore options.
Our Analysis: The shares of Greg Manning Auctions ‘GMAI’ have pulled back recently after setting a new closing high prior to announcing a new online auction venture with eBay, Inc. ‘EBAY’. This pullback has occurred on lighter than normal trading volume, which is normally a very bullish indicator. We continue to believe that Greg Manning Auctions ‘GMAI’ is the most undervalued of the publicly traded auction companies, which in our opinion makes this company an attractive take over target. In addition to this we feel the management of Greg Manning Auctions ‘GMAI’ is of very high quality and as a result has implemented a superior business model that will allow it to survive and prosper in a competitive industry. The recent decision of OnSale ‘ONSL’ to merge with Egghead.com ‘EGGS’ helps support of belief in the quality of the business model of Greg Manning Auctions ‘GMAI’ as OnSale ‘ONSL’ was finding it difficult to generate a profit and survive on its own.
Last week Greg Manning Auctions ‘GMAI’ announced a teaming agreement with eBay, Inc. ‘EBAY’ which includes a branded GMAI site on eBay’s premium site this fall, which will bring the GMAI brand before eBay’s 3.8 million registered bidders; and we believe, upon its launching, will greatly increase the traffic to GMAI’s domestic, Asian, and European websites. This will broaden the ‘GMAI’ customer base worldwide and strengthen its global brand. We believe that Greg Manning Auctions Inc.’s recent agreement with eBay will be significant for both companies. eBay is not only one of the busiest sites on the web but they also have one of the longest viewing periods per visit out of any site. GMAI brings to the table expertise and fulfillment capabilities that we believe give ‘GMAI’ is a significant long-term advantage over its competitors. Other online auctions companies will either need to add a GMAI-like service if they are going to survive long term within this industry, or they may be making an exit from it such as OnSale ‘ONSL’ has.
As of this writing there are approximately 900,000 auctions that are currently being conducted on eBay that involve the various items auctioned by Greg Manning Auctions. Each one of these weekly auctions will now have access to GMAI, Teletrade, and GMAI’s areas of expertise including being a world leader in Stamps, and large forces in sports collectibles, diamonds, coins, plus movie and rock and roll memorabilia. In addition this Greg Manning’s expertise in shipping auctioned items, acting as an escrow agent to ensure payment and deliver of goods auctioned, and its online price guide should dramatically add to the comfort level of online auction participants.
It is important to note that eBay ‘EBAY’ signed what appears to have been a similar agreement with Butterfield & Butterfield approximately 60 days before agreeing to acquire Butterfield & Butterfield for approximately $260 million in late April of this year. We have stated before that a valuation equivalent to Butterfield’s (now a division of eBay) would put GMAI shares equal to $42 a share. This is before we take into account operations in Europe, Asia, and Latin America. GMAI has positioned itself to become a global force in many of these markets.
GMAI has been carefully positioning itself strategically in each of these markets, which may involve possible spin-offs or acquisitions in their own right to which GMAI is majority shareholder. There is a great deal of hidden value in this company!
Sotheby’s has had repeated difficulties in their attempts at launching an online auction service to compliment their existing business. We believe it is these repeated difficulties and their inability to launch a live online auction service that motivated them to seek a partnership with Amazon.com ‘AMZN’. Unfortunately, neither of these companies has any experience in the online auction field, something that both eBay ‘EBAY and GMAI have demonstrated their ability to excel at.
We still feel that GMAI is extremely undervalued. Their revenue number should be a record for this past year which ended June 30, 1999. They have been spending money to grow strategically while not sacrificing earnings. From a technical standpoint we feel that the shares of ‘GMAI’ have a very bullish chart pattern that indicates a higher price level. From a fundamental standpoint we believe that the company is successfully positioning itself to be the leader in its fields of expertise, and that it can bring complimentary skills to other auctions companies. The pending NASDAQ National Market System listing should bring additional market makers to ‘GMAI’ and create greater institutional interest in the company.
With the recent run up to $28.50 followed by a retreat in the general markets and the sector, we feel that these shares will soon shine again surpassing these recent highs, and hitting new ones. Our near term price target for GMAI is $32.81/share, with an intermediate term (4 weeks or less) of $38.875/share. On a buyout basis we feel the shares of ‘GMAI’ could see a value as high as $50.00/share.
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