Stock Mart: Daisytek

Since 1977, Daisytek International (DZTK) has been solving the more mundane problems of American corporate life, such as what to do when the copier runs out of toner. But in recent years, it also has had some problems of its own.

The Plano, Texas, company is one of the leading wholesale distributors of non-paper office products, such as toner cartridges, printer ribbons and fax machine supplies. Daisytek moves the stuff from manufacturers like Hewlett-Packard (HWP) to major superstores, office-supply chains and computer-resale stores. However, Daisytek noticed a few years ago that its U.S. business was stagnating.

"I can't put my finger on the No. 1 reason," says Mark Layton, Daisytek's president and chief executive. It may have had to do with orders for new printers slowing, leading to lower demand for printer products, he says. Or perhaps people were shaking their toner cartridges and making them last longer.

Whatever the reason, Daisytek had do to some shaking up itself. So two years ago, the company went on a diversification campaign, creating an international presence for its computer products, acquiring a professional tape division that supplies tape and film to the movie industry and establishing a distribution outsourcing unit, Priority Fulfillment Services, or PFS. In January, that subsidiary created PFSWEB to offer its outsourcing service to customers over the Internet.

Now, those customers are turning to Daisytek for e-commerce solutions, including handling online credit-card transactions and warehousing and shipping of products. "We can handle things from the click of a mouse to the knock on the house," jokes Layton. (Layton has put his money where his vision is; he purchased 19,000 shares in two blocks earlier this year.)

The outsourcing sub, especially the online part of it, is causing some analysts to remain bullish even though the company's core U.S. distribution business -- which still accounts for 60% of its revenue -- is flat. The international market for Daisytek's computer products distribution, which is growing, accounts for about 25% of the company's business.

"I think the prospects are good for this company," says Kenneth Salmon, an analyst for Tucker Cleary, a unit of Freedom Securities (FSI). "Even though its core computer supply sales are sluggish, its outsourcing business is growing rapidly." Salmon upgraded the stock to a strong buy from a buy on May 7. (Although Daisytek doesn't break out numbers on its subsidiaries, it did report that the outsourcing service accounted for about 10% of its gross earnings last year. That number is expected to grow to 14% this fiscal year, according to Salmon.) Freedom Securities hasn't performed underwriting for Daisytek.

However, before the tail starts wagging the dog, one bearish analyst, who requested anonymity, cautions that Daisytek still has to perform in its core business. "PFS is a neat and interesting business with an e-commerce component," says the analyst. "But it's hard to look at that sizzle and ignore the remaining 95% of the business in the near term."

On May 5, Daisytek reported total sales of $908.6 million for the fiscal year ended March 31, a 13% increase over the previous year's $800.1 million. (The company restated its numbers for fiscal 1998 to account for its acquisition of The Tape Store last year.) The company earned $18.8 million, $1.06 a share, in fiscal 1999, compared with $17.5 million, or $1.14 a share, a year earlier. Daisytek had more shares outstanding in the most recent fiscal year.

Although the earnings were in line with expectations -- which had been guided lower by the company months before -- evidence of continued softness in the company's core business helped pound down the stock. It fell 21% to close at 14 1/8 after hitting a new 52-week low of 12 1/2 in intraday trading the day the earnings were released.

However, a recovery is underway and the stock is up 15% since hitting that low. It closed Friday at 14 3/8, off 5/8. That gives the $255 million market cap company a trailing price-to-earnings ratio of 13.97 -- less than half of the 29 P/E ratio of the Standard & Poor's 500 index. The company's price-to-book ratio for the most recent quarter is 1.67, and its trailing price-to-sales is 0.29 -- making the stock a good bargain at these levels, analysts say.

Tucker Cleary's Salmon has a 12-month target price for the stock in the high-20s, close to double its current value. Of the five analysts who have recommendations on Daisytek, four are either buys or strong buys. The lone holdout, Robert W. Baird in Milwaukee, ranks the stock a hold.

Layton, the CEO, says he's confident the core business is set to rebound, which then will combine with the outsourcing unit's fast growth to make a stronger company. "Our objective is to remain the king of computer products distribution, but when you see that kind of growth [in the PFS subsidiary] you realize it is going to become a very significant part of your profit picture."

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