Looking to pedal your portfolio a little faster? Take a look at

Huffy

(HUF)

.

Well-known for its bicycles and tricycles, Huffy is growing into a more diverse recreational play. The company recently purchased

Gen-X Sports

for about $50 million in cash and stock, and the acquisition could add up to $150 million in annual revenue and should boost earnings as early as this quarter. With a little luck this Christmas selling season, Huffy could be a nice gift for your portfolio.

Training Wheels

Huffy has seen some bumps and bruises. Since 1996 its sales have seen steady declines, as have earnings and cash flow. In 1999 the company hit bottom, losing $1.43 per share. Facing a cash crunch, it slashed its dividend and began the painful process of remaking itself. It stopped manufacturing bicycles (it still brands and distributes imports), sold non-core businesses, including its True Temper hardware division, and focused on its core leisure and recreational products.

Now Huffy looks poised for steady improvement, especially if an economic recovery helps to push growth in recreational products. Along with its diverse line of wheeled products, the company also has a strong market in athletic equipment such as basketballs, footballs, soccer equipment and basketball game sets. Huffy has also been successful in developing a branded assembly and repair service, which now contributes about 25% of the company's sales.

The acquisition of Gen-X should also be a major driver for Huffy's growth. It will bring an entirely new product set to Huffy, including skiing equipment, well-known Gen-X snowboards, in-line skates and hockey products. Gen-X products carry higher price points and margins than traditional Huffy offerings. In addition, the acquisition brings Huffy a new set of customers with cross-selling opportunities. Some modest operational synergies should help reduce the combined company's overhead.

An Uphill Climb

Although Huffy has made meaningful strides in rebuilding its financial condition and diversifying product offerings, challenges remain. Before the Gen-X acquisition, 80% of Huffy's sales came from just 10 customers, including bankrupt

Kmart

, whose store closings are sure to be reflected in Huffy's sales. To post steadier growth, Huffy needs to expand its retail distribution channels.

The company also faces litigation regarding the spinoff of its former Washington Inventory Services unit. The outcome isn't clear, and Huffy's liability is uncertain, but management remains cautious in its outlook. "This may cast a cloud over Huffy stock until these issues are resolved," notes Value Line analyst Allan House. The company said in late November that if it can resolve the two suits, it will likely take a charge of nearly $8 million in the December quarter.

Coasting

Huffy is an intriguing turnaround story that now has a clean balance sheet (no meaningful debt) and more balanced product mix. Its prospects that should help sales grow by at least 10% to 15% in the coming years. With a better operating strategy and improving margins, the company should be able to post steady earnings growth in the next three years.

From a valuation standpoint, Huffy seems reasonably priced. If the company can earn 80 cents a share in 2003, the stock currently trades below 10 times earnings. With book value approaching $8, there appears to be fundamental support at current levels.

The biggest risks are a marked slowdown in consumer spending, a damaging outcome to current litigation or major turmoil at another large customer. Each of those scenarios is possible, but Huffy's current stock price of $6.90 seems to discount at least some bad news.

I like Huffy bikes, Gen-X Snowboards and what Huffy is doing. The company still has to prove itself with the new acquisition, but I give it two and a half barrels. I view the stock as a solid long-term, small-cap recreational play. (For an explanation of our barrel rating system,

see our description.)

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Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to

Chris Edmonds.