For Topps ( TOPP), the original baseball-card company, summer used to be the hottest season. Now, however, ever-changing fads make it increasingly hard to predict whether the company will hit a home run or simply strike out.

I remember those hot July and August days when I couldn't wait to hop on my Schwinn five-speed and zip to the corner store to grab a new pack of baseball cards. Back then, it seemed like Chris Chambliss was in every pack, but so too was that stick of really hard bubble gum that my mother often found stuck somewhere it wasn't supposed to be.

Those were the brightest days for Topps, but even today, it's a leading manufacturer of novelty items, including trading cards of pro athletes and entertainment icons like Pokemon. Plus, the company has a candy division, which creates such confections as Bazooka gum and the Bazooka Pop lollipop.

Topps hasn't been on top of its card game for a number of years. In fact, a majority of its sales now come from candy rather than trading cards.

Bursting Bubbles


Topps
(TOPP:Nasdaq)
Current Price $8.81
52-week range $10.57-$7.24
P/E Ratio* 22.1
Market Cap $358.6 million
Average Daily Volume 103,000
Inst. Ownership 79%
Dividend Yield Nil
Beta RT 0.91
Company Web Site www.topps.com
*Based on 2003 Source: Value Line, Company Reports, TSC Research

The trading-card business has changed, and Topps -- like so many other companies faced with outside challenges -- was slow to respond. There are no more wax packs and certainly no more bubble gum in trading cards. The quality of offerings from groups like Upper Deck has also created intense competitive pressure. Plus, the competition for rights of certain athletes has become big business, likely putting pressure on margins in coming seasons.

Topps found a real savior several years ago when it began producing Pokemon cards. However, fads fade and so do their sales. Although Topps had $180 million in Pokemon sales in 2000, that number dropped to $24 million in 2001 and a paltry $6 million last year.

That doesn't mean that an athlete or another entertainment concept won't come along to re-energize Topps' sales. However, the company isn't expecting anything along those lines anytime soon. In fact, Topps is reducing new products from its card division as well as slashing jobs and restructuring the division this year. Although a number of promising young athletes are entering the professional ranks this year, Topps appears more likely to find another blockbuster trading-card idea in the nonsports entertainment area where competition is less intense.

Topps does sport a popular line of candy from its Bazooka-branded products, including the popular Ring Pop and Push Pop stick candies. Yet, even with a stable of recognized products, the company saw little sales growth in 2002. Topps plans to step up advertising and brand marketing this year in an attempt to boost sales, but candy growth only in the midsingle digits is probably the best investors can expect.

The company may also consider new product launches, but even fad-like success of new items would probably not have a meaningful impact on 2003 sales. Moreover, the strategy would likely pressure margins because new products require more upfront marketing spending.

Virtual Cards and Virtual Growth

Topps has launched an online offering, eTopps, which many analysts believe holds promise. However, it's not yet profitable and, like other online media, faces the challenge of finding the right revenue mix. But in a world that is increasingly becoming virtual in almost every aspect, virtual trading cards could give Topps an edge on new innovations in the business.

Still, the company faces an uphill battle to grow its core business in the months ahead. With growth in both the collectibles and candy business expected to be in the single digits, it's hard to argue that Topps deserves its current multiple.


Not in the Cards
Topps' growth is tough to grasp
Year Revenue (in millions) Earnings Per Share
2002 $290.10 $0.40
2003E $285.00 $0.45
2004E $300.00 $0.50
Source: Value Line, Company Reports, TSC Research

The company does have a clean balance sheet and has been repurchasing its own stock, which has provided support for the share price. The company bought back more than 1.5 million shares last year and has authorization to repurchase up to 2.6 million shares. With plenty of cash, those repurchases will probably continue.

Believe me, I want to like Topps because the name brings back great childhood memories. But the world changes and Topps has struggled to change with it. With earnings growth dependent on entertainment fads and the next sports star, this is a tough small-cap to play, unless you can predict when the next entertainment hit will turn into a cult-like trading-card fad. When that happens, Topps might become a buy. I'm giving it one barrel. (For an explanation of our barrel rating system, see our description .)


The Bottom of the Barrel column runs each Wednesday, taking a look at underfollowed small-cap stocks. Many of the ideas for the column -- including Topps -- come from readers like you. If you have an idea for a company that would fit the Barrel concept, shoot me an email . If I select your suggestion, I'll send you a TSC T-shirt or cap.


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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.

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