Stock Mart: LaserPacific Media

If you're looking for cheap, undiscovered media companies, pay attention to Russell Anmuth.

Last year, Anmuth, a hedge fund manager at Gotham Holdings, pounded the table on Gemstar (GMST), the leader in the obscure but profitable business of programming guides like VCR Plus+. Since a July 1998 TSC story highlighting his comments, shares of Pasadena, Calif.-based Gemstar have quadrupled, adjusted for a split.

Earlier this year, Anmuth struck again, recommending 4Kids Entertainment (KIDE). That New York company licenses products for Pokemon, the Japanese sensation that's become a hit with U.S. kids. Since March, when TSC wrote about 4Kids, the stock has -- you guessed it -- more than quadrupled, adjusting for two stock splits. (For the year, 4Kids is up eightfold, though some analysts wonder how long the Pokemon craze can last.)

Now Anmuth is excited about another small media company. Like 4Kids and Gemstar, it operates in a backwater of the entertainment industry, ignored by most analysts. Like 4Kids and Gemstar, its stock is already moving as savvy investors notice its potential. And like 4Kids and Gemstar, it has both improving financials and fundamental trends moving its way.

So will LaserPacific Media (LPAC) join 4Kids and Gemstar as Anmuth's next four-bagger? The fund manager, who owns more than 200,000 shares of LaserPacific, some 2.5% of the company, sounds confident. "This is a company that could really grow exponentially over the next three to five years," he says. His price target for the stock, which now stands at 9? "Higher."

With more than 200 employees, Hollywood-based LaserPacific is a leader in television and film "postproduction." That's the grunt work of editing movies and television shows for color and sound, along with adding credits, music and minor special effects.

Postproduction has been steadily increasing thanks to the explosion of new networks producing original programming, but it has historically been competitive, low-margin work. The studios keep some work in-house, and dozens of independent labs fight for the rest.

The thin margins of standard postproduction work left LaserPacific struggling in the mid-1990s. The company saw revenue fall to $28 million in 1997 from $30 million in 1994, and after turning in a profit of $481,000 in 1994, Laser lost a total of $3.25 million in the next three years. Investors noticed. Laser's stock, which went public at 6 in 1991, fell as low as 1/8 in late 1997.

To get out of its hole, Laser needed to refocus on higher-margin services. So the company sold its Canadian subsidiary, which provided postproduction services for movies and television shows made in Vancouver, and staked its future on digital services, including digital video discs and high-definition television.

"I felt it was a better strategy to redeploy those funds [from the Vancouver lab] in expanding our high-definition capabilities here in Los Angeles," LaserPacific Chairman James Parks says.

That decision was a risky one. DVD was an expensive new technology with limited consumer acceptance two years ago, and HDTV basically didn't exist at the retail level. Even now, fewer than 3 million U.S. homes have DVD video players, and most Americans have never seen an HDTV broadcast.

But the move toward digital is inexorable, and it's gaining momentum. Sales of DVD video players were up more than fourfold in the first half of the year compared to 1998. By 2002, more than half of all U.S. homes are expected to have a DVD device, including computers equipped with DVD drives, according to Strategy Analytics, a British electronics consulting company.

As for digital television, the Federal Communications Commission has mandated that all broadcasters provide a digital signal nationally by 2006, although it's still unclear whether they will offer true HDTV or just a slightly enhanced version of a standard analog broadcast. (HDTV, which provides a film-quality picture on television, requires more bandwidth than a less-sharp digital picture, so broadcasters like CBS (CBS) will eventually choose whether to offer one channel of HDTV or several standard-quality digital channels in their broadcast spectrum.)

Either way, demand for digital television postproduction services is certain to increase, LaserPacific Chairman Parks says: "To do something a little bit better than standard television means you still have to have [digital processing]."

And thanks to its aggressiveness last year, Laser is the leader in HDTV services. This season, there are expected to be 15 or 16 network shows offered in HDTV, all on CBS, courtesy of Mitsubishi, which is sponsoring the shows as a way to build demand for HDTV and sell its pricey new digital televisions. LaserPacific is working on nine of those shows.

"We are the only facility that can actually complete a show in high definition right now, and we are the only facility that has actually completed a show in high definition," Parks says. A spokeswoman for Sony Pictures' Digital Studios Division, which is both a partner and competitor for Laser, agrees that Laser has an excellent reputation in the digital services division.

"The company has turned the corner in a very big way. ... They are, without a doubt, the leader in high definition," says Burnham Securities analyst Bruce Galloway, who specializes in following turnarounds and is the only analyst to cover LaserPacific. (Burnham, a regional New York investment bank, has not performed any underwriting for Laser.)

So far, the company's edge in digital work hasn't translated into bottom-line gains. The digital business more than doubled in the first six months of 1999 but still represented only about 10% of LaserPacific's total business. Overall, LaserPacific recorded about $13.5 million in sales in the first six months of 1999, up from $12 million in 1998, not including 1998 revenue from its Canadian subsidiary. But profits were flat, and small, in both periods -- about $550,000 in total, or 7 cents per share.

But that's about to change, Galloway and Anmuth say. Fall and winter are the fat seasons for television production, as networks order fresh episodes. Galloway expects that strong sales from LaserPacific's traditional postproduction business, along with fast growth and wider margins from the digital business, will push third-quarter profits to 12 to 15 cents per share compared to 2 cents in the prior-year period.

For the fourth quarter, Galloway's expecting earnings of 35 cents a share or more vs. 29 cents last year. That would give Laser full-year earnings of better than 50 cents per share. For next year, the analyst is even more optimistic, predicting earnings of 75 cents or more. Laser stock has already nearly quadrupled this year, as micro-cap investors get wise to its prospects. But with its price now around 9 and a market cap of roughly $70 million, the company still trades at only 12 times 2000 earnings forecasts.

In addition, Liberty Media (LMG.A), John Malone's $40 billion media holding company, recently took control of postproduction companies Todd-AO (TODDA) and Soundelux Entertainment Group and is rumored to be talking to other companies in the industry. If Liberty does make more acquisitions in an effort to "roll up" the fragmented industry for economies of scale, LaserPacific is a natural target, Anmuth says. (Liberty did not return calls for comment.)

"Some reasonably smart guys think this is the future," Anmuth says. "The arrows all point in the same direction."

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