Sterling Investment Services

SMALL CAP RESEARCH REPORT
February 22nd, 1999

STRONG BUY RECOMMENDATION
1st Follow Up Report
Greg Manning Auctions, Inc. ‘GMAI’

This is our first follow up report on Greg Manning Auctions since we initiated research coverage on the company on November 23rd of last year.  Our original report can be viewed at www.sterlinginvestments.com/gmai/nov23.html  Since our original report was published there have been many positive developments concerning Greg Manning Auctions that we feel merit continued interest in the company’s stock.  I am maintaining a Strong Buy rating on the company’s shares.
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 from which it can generate substantial profits.  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 understanding the market for the items auctioned.

Late last year the company acquired Teletrade which specializes in interactive auctions over the telephone and Internet.  This acquisition has greatly expanded the reach of the company and the scope of the items offered by the company.  Teletrade auctions sports cards,  rare coins, fine art and other collectible items.

Greg Manning Auctions also acts as an escrow agency to ensure 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.
Recent Events:

Afinsa Increases its Investment in Greg Manning Auctions
Afinsa is a large Spanish Auction house that operates over 50 Art Galleries in Spain.  It is one of the largest auction houses in the world.  The company has been a long term strategic investor in Greg Manning Auctions.  They first began purchasing shares in Greg Manning Auctions in open market transactions several years ago when the stock was in the $1-2.00/share price range.  They have continued their open market purchases as the shares have moved higher following the acquisition of  Teletrade,  which Afinsa views as a very positive development.

Afinsa recently decided it would like to invest directly into Greg Manning Auctions.  Afinsa decided to invest $5 million dollars directly into Greg Manning Auctions as a long term investment.  On February 10th,  Greg Manning publicly announced that Afinsa would invest $5 million dollars directly into Greg Manning Auctions. The shares purchased will be restricted under Rule 144,  and contain a “lock up” provision for 1 year following their registration date.  With these recent purchases,  Afinsa now owns an estimated 17-18% of the outstanding shares of Greg Manning Auctions.

Auction of 1 millionth Coin over the Internet
In early February of this year the company announced that its Teletrade subsidiary would soon auction its one millionth coin over the Internet.  The company also announced that its Teletrade subsidiary would hold its one thousandth auction of sports cards and other sports memorabilia later this year.

Teletrade pioneered e-commerce auctions in 1987 through the use of interactive telephone computerized auctions in 1987.  In October of 1998 the company launched auctions for diamonds.  In its first month of conducting diamond auctions the company saw diamond sales prices as high as $46,500 for a single diamond.

Record 2nd quarter results
In late January of this year,  Greg Manning Auctions reported record results for its fiscal second quarter.  Net income for the second quarter rose to $0.04/share from a loss of ($0.14)/share.  The company stated that approximately 40% of its revenue was the result of on-line sales.

Acquisitions
In late December of last year Greg Manning Auctions purchased Executive Collectibles Gallery, Inc..  In doing so Greg Manning Auctions named the founder of the company,  Bill Hughes, to the position of Vice President of the Collectibles Division.  This acquisition expands the breadth of  the products offered and should lead to an increase in sales and earnings for Greg Manning Auctions.

AT&T Video Imaging Technology
In mid December of last year,  Greg Manning Auctions announced that it would begin using new video imaging technology developed by AT&T Labs,  known as DjVu.   This technology offers image compression rates up to 10 times greater than existing technology.  I view this as a significant development.  It demonstrates the commitment by Greg Manning Auction to develop a state of the art web site for its auction business.  In addition to this the higher quality and faster image processing technology should allow for a greater access to the Teletrade web site.
Growth Potential:
We believe that Greg Manning Auctions will be able to increase its revenue to approximately $100 million in the next fiscal year.  Our earnings per share estimate is $0.50/share.
Comparables:
Since our initial report on Greg Manning Auctions, our list of comparables has expanded from the original 3 comparables of eBay,  ONSALE, and Ubid to include Sotheby’s Holdings, Inc. and Richie Bros. Auctioneers.  To the best of our knowledge these six companies listed below comprise all the known publicly traded auction companies.  Several other firms have announced their intentions to move into this business, but have not yet demonstrated any viable auction business and are therefore not included in our list of comparables.

Sotheby’s recently announced that it would invest $25 million dollars to launch its own Internet auction site.  For that amount of money they could have purchased a significant stake in Greg Manning Auctions and arranged a strategic relationship to gain the use of the Teletrade Internet site.

Richie Bros. Auctioneers specializes in the auctioning of heavy construction equipment.  Last week Richie Bros. announced that it would begin conducting auctions on the Internet.  I have personally attended several auctions conducted by Richie Bros.  I am very familiar with the equipment auctioned by Richie Bros.  I have serious doubts about the desirability of bidding on heavy construction equipment on the Internet due to the need to inspect the equipment to determine the mechanical condition of the equipment.  There auction site will definitely be a benefit to their business,  but I do not believe it will generate a huge increase in their business.

Our Analysis:
By all measures of valuation Greg Manning Auctions is the lowest valued of the publicly traded auction companies.  Due to the lack of profits among our comparables a direct comparison of Greg Manning based upon profits is difficult.  The fact that Greg Manning is profitable is a very large positive for the stock..  The most effective direct comparison is based upon a market capitalization multiple to sales.  For accuracy, we will remove eBay from the comparables, because eBay’s absurdly high number distorts the results.  Removing eBay from the multiple of sales brings the average among the comparables to 4.97.  This means that the average auction company has a market capitalization equal to 4.97 times its annual sales.  A similar valuation for Greg Manning Auctions would produce a market capitalization of $223 million.  This would translate into a per share price of $33.85/share.

To the best of knowledge there are only six publicly traded auction companies.  Of these six companies only three of them are profitable;  Greg Manning Auctions,  eBay,  and Sotheby’s Holdings.  The extremely high and unrealistic market valuation of eBay does not make in an attractive investment in our opinion.  In our opinion eBay would need to generate in excess of $3 Billion in annual sales to justify its current market capitalization.  The main purpose of business is to generate profits,  otherwise it would be a charity or a government enterprise.   Sterling Investment Services has serious doubts as to the ability of the auction companies that specialize in used computer equipment and other commodity items to generate substantial profits.  It is one of our beliefs that when investing in a company,  the focus needs to be on their ability to produce substantial and sustainable profits.  Removing eBay from our list of three profitable auction companies leaves us with Sotheby’s and Greg Manning Auctions.  By all measures of comparison Greg Manning Auctions is significantly undervalued when compared to Sotheby’s.  We feel this creates very significant upside potential for the shares of Greg Manning Auctions.  In fact, when compared to all five of the other publicly traded  auction companies,  Greg Manning Auctions has the lowest market capitalization,  price to book,  price to sales,  and price to earnings ratios.  This in our opinion makes Greg Manning Auctions the most attractive of the companies within this industry.
Our Recommendation: Strong Buy
Sterling Investment Services is placing a “Strong Buy” recommendation on the shares of Greg Manning Auctions,  NASDAQ Ticker symbol ‘GMAI’.

Contact Information

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

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Disclaimers:
Sterling Investment Services, Inc. is an independent research and investment management firm.  Sterling Investment Services, Inc. did not receive any compensation for the production of this research report.  Sterling Investment Services, Inc. is a shareholder in Greg Manning Auctions though its own account and accounts that it manages.  Sterling Investment Services, Inc. publishes 3 daily newsletters.  You are invited to sign up for a free trial offer to any of our services listed below.

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