Hedgies May Rock Guitar Center

This column was originally published on RealMoney on Sept. 25 at 2:01 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

I think I'm in love, and her name is Guitar Center (GTRC - Cramer's Take - Stockpickr).

First of all, I always love people who are good at math, and Guitar Center has shown aptitude with its numbers: Revenue has climbed in stair-step fashion from $949 million in 2001 to $1.78 billion in 2005, and operating income has grown over the same period from $46.32 million to $132 million.

The company started in 1964 in Westlake, Calif., and it comprises two retail chains: Guitar Center, which has 183 stores that sell, of course, guitars, as well as percussion instruments, keyboards and recording equipment, and 90 Music & Arts Center stores, which primarily sell band and orchestral instruments to students, schools and orchestras.

In its last quarter, Guitar Center grew sales 14% annually; Music & Arts' sales rose 28%. Parents are not letting their kids buy instruments online. They have to buy the best, and they have to touch and play these instruments. In other words, Guitar Center appears to have a moat that keeps e-commerce from encroaching.

However, the company has been in the penalty box recently. It reported only 4% year-over-year net income growth in the last quarter, far below its 18% annual average over the past five years. It also guided to the low end of its $489 million to $501 million revenue range for the year and its 43 cents to 49 cents earnings-per-share range. To keep the numbers growing, management would like to double the number of stores. The question is, how many guitar stores do people really need?

In step the hedge funds. Sageview Capital just filed a 13D stating it owns 6.46% of the company. It bought shares at prices ranging from $37.28 to $40.90; currently the stock is above $44.