Bottom of the Barrel: On Track With Innotrac

While it's relatively small, Innotrac's ( INOC) latest news may give investors a reason to go shopping.

Atlanta-based Innotrac was started in 1984 and today offers end-to-end marketing support, order fulfillment and call center service for clients from its Atlanta headquarters plus operations centers in Reno, Chicago and Pueblo, Colo. Innotrac's services include inventory management, order tracking, transaction processing and return management.

The company's customer list is impressive including BellSouth ( BLS), Coca-Cola ( KO), Martha Stewart ( MSO), and NAPA. Just this week it added upscale gardener Smith & Hawke to its customer list and announced plans to add a 300,000-square-foot fulfillment center just outside Cincinnati.

Turning Around

The inventory logistics and fulfillment markets have felt the pinch of a slowing economy. Although retailers have continued to post good results, much success has come from cost reductions that directly impact companies like Innotrac. That's prompted three Innotrac competitors -- J.C. Penney Logistics, Fingerhut and Keystone -- to leave the fulfillment business in the past six months.

At a Glance
Current Price $4.90
52-week Range $8.92 - $3.30
Price-to-Earnings Ratio* 30.6
Market Cap 57.2 million
Avg. Daily Volume 18,772
Inst. Ownership 17%
Dividend Yield Nil
Beta 1.07
Company Web site
*Based on 2002 Estimates. Source: Market Guide, FirstCall, Company Reports

While that may have reduced competition, it also shows just how tough the business is. Innotrac's 2002 revenues will be 22% lower than 2001, and earnings are expected to sag nearly 60%. To keep customers such as Bell South and Nordstrom, Innotrac reduced pricing, a move that will cost the company about $1 million a year. And, companies like Home Depot and SBC Communications dropped Innotrac's services, reducing Innotrac's annual operating income by about $3.5 million.

Although more defections are possible, an improving economic outlook combined with fewer competitors leaves Innotrac in a good position to capitalize on a turnaround.

"Innotrac is taking share from its competitors for four reasons," notes SunTrust Robinson Humphrey analyst Bill Warmington. "A strong balance sheet, especially versus its competitors; a solid track record in performing for clients; integrated call center and fulfillment product offering; and competitors are exiting the business and leaving clients in the lurch." He rates the stock "buy" with a 12-month price target of $9. His firm has provided banking services for the company.

Warmington says the Smith & Hawken contract -- which should add $6 million to $8 million in annualized revenue -- represents an important turning point in Innotrac's business. He expects Innotrac to ink $10 million to $12 million in new contracts this year and notes that each $1 million in new contract revenue should add 2 cents to the company's earnings.


While the fulfillment business is pretty simple, there are risks to Innotrac's model and business profile. First, while it continues to shrink, the company's exposure to the telecom sector is significant. At the end of the first quarter, telecom accounted for just over 32% of the company's business. Also, the company's fastest growing business is high-speed DSL fulfillment for regional bell operating companies, which was growing by more than 6% annually as of the end of the first quarter. However, the travails of telecom companies make for some uncertainty regarding the future of that business. According to data provided by Warmington, BellSouth -- one of Innotrac's original customers -- represents 30% of Innotrac's total revenues.

On Track at Innotrac
Revenue and earnings are stabilizing
Year Sales(in millions) Earnings Per Share
2000 $174.1 $(0.04)
2001 94.8 0.38
2002* 74.1 0.16
2003* 88.9 0.45
* EstimatesSource: FirstCall, SunTrust Robinson Humphrey, Company Reports, TSC Research

That concentration is shifting: retail and catalog sales were 33% of 2001 revenues and are estimated to increase to half of total revenues by the end of this year and to 55% to 60% in 2003. While that balance is good, a higher percentage of retail-related revenues mean the company is more closely tied to the consumer economy.

Finally, although this micro-cap -- only $57 million -- has no debt, it is spending nearly $3 million in the coming year to upgrade technology and logistics infrastructure. Those expenses are likely to increase as the company grows. Because the company is also looking at acquisitions, it is likely Innotrac will either be in the equity or debt markets in the future. While not necessarily problematic, acquisitions for companies of Innotrac's size are inherently more risky.

Still, with an improving economy and additional new contracts similar to the Smith & Hawken contract announced this week, Innotrac should be able to grow revenue and earnings at a 15% to 20% clip over the next three years. While external growth always entails more risk and volatility, we think Innotrac is an interesting play on an economic recovery. Its small size and reliance on telecom are concerns but the growing business diversity is encouraging. We give Innotrac two barrels.

For an explanation of our barrel rating system, see our description.


Last week we suggested taking a look at both Endocare ( ENDO) and NetBank ( NTBK) as possible trades. Endocare worked -- up more than 12% -- but NetBank was off about 5%. This week, we move NetBank up a notch, to the above average portion of the portfolio. The company appears on track to make 13 cents in the quarter and 65 cents for the year. Under $12, NetBank should provide 15% to 20% returns over the next year.

Barreling Along
Raising NetBank to Above Average
Current Rating Company/Ticker Date of Mention Price 10-Jun Mention Price* % Change From Mention % Change Last Week
Above Average Outlook
Fidelity National (LION:Nasdaq) May 8, 2002 $10.50 $10.58 -0.76% -1.22%
NetBank (NTBK:Nasdaq) Feb. 6, 2002 11.77 13.45 -12.49 -5.23
Endocare (ENDO:Nasdq) Jan. 23, 2002 15.12 18.21 -16.97 12.17
SurModics (SRDX:Nasdaq) Dec. 19, 2001 33.66 34.60 -2.72 3.54
FPIC Insurance (FPIC:Nasdaq) Nov. 14, 2001 13.25 12.83 3.27 -11.01
Average Outlook
Champps Entertainment (CMPP:Nasdaq) May 29, 2002 $12.50 $13.01 -3.92% -3.25%
Wilsons Leather (WLSN:Nasdaq) May 22, 2002 14.40 14.96 -3.74 -0.69
Trico Marine (TMAR:Nasdaq) May 1, 2002 7.20 8.25 -12.73 -6.01
Arch Chemicals (ARJ:NYSE) April 24, 2002 22.46 22.52 -0.27 -1.49
Hines Horticulture (HORT:Nasdaq) April 17, 2001 4.10 4.75 -13.68 -6.82
UCBH Holdings (UCBH:Nasdaq) March 27,2002 37.63 35.65 5.55 -2.03
Cost Plus World Markets (CPWM:Nasdaq) March 6, 2002 32.84 25.83 27.14 3.76
Rare Hospitality Intl. (RARE:Nasdaq) Feb. 20, 2002 29.30 25.72 13.92 7.96
VitalWorks (VWKS:Nasdaq) Nov. 21, 2001 8.58 4.30 99.53 -1.38
Coastal Bancorp (CBSA:Nasdaq) Dec. 12, 2001 29.90 27.84 7.40 -3.42
Coinstar (CSTR:Nasdaq) Nov. 7, 2001 27.00 19.96 35.27 -4.19
Witness Systems (WITS:Nasdaq) Oct. 31, 2001 6.01 8.06 -25.43 1.86
Hibbett Sports (HIBB:Nasdaq)** Oct. 24, 2001 26.40 20.04 31.74 -0.75
Quixote (QUIX:Nasdaq) Oct. 3, 2001 17.31 21.44 -19.26 -0.23
Below Average Outlook
Actrade (ACRT:Nasdaq) Jan. 30, 2002 $13.57 $20.65 -34.29% -12.28%
Goody's Family Clothing (GDYS:Nasdaq) Nov. 28, 2001 10.40 4.50 131.11 1.76
Bridgford Foods (BRID:Nasdaq) Oct. 10, 2001 14.49 13.18 9.94 -3.40
Quanta Systems (PWR:NYSE) Jan. 9, 2002 12.75 16.05 -20.56 9.35
Bottom of the Barrel Income Portfolio
Acadia Realty (AKR:NYSE) June 5, 2002 $7.20 $7.03 2.42% 1.55%
Capital Automotive REIT (CARS:Nasdaq) April 3, 2002 22.91 22.95 -0.17 -4.54
Laclede Group (LG:NYSE) March 20, 2002 23.31 23.64 -1.40 -2.88
Alexandria Real Estate (ARE:NYSE) Feb. 13, 2002 46.75 40.25 16.15 0.52
Empire District Electric (EDE:NYSE) Jan. 16, 2002 19.46 21.23 -8.34 -2.21
Met-Pro (MPR:NYSE) Oct. 17, 2001 14.96 11.16 34.05 -0.13
Integra Bancorp (IBNK:Nasdaq) Jan. 2, 2002 22.60 20.75 8.92 0.76
Bottom of the Barrel Special Situation Portfolio
Luby's (LUB:NYSE) Feb. 27, 2002 $6.80 $6.22 9.32 1.49
*Average price on date of mention.
**Prices adjusted for 3:2 split on Feb. 20, 2002
Source: Thomson Financial/First Call, TSC Research

Do you have candidates for Bottom of the Barrel? If so, shoot me an email with the company's name, why you think it qualifies, and your full name and hometown. If I profile your suggestion, I'll send you a TSC gift to commemorate your pick.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds was long BellSouth, 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.

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