SAGE ST. JOURNAL

Industry B Newsletter:

Volume 1, Number 4 December 31, 2004

Recent Events:

We said something last year about a good horserace. We take it back. Industry B is looking more like a dog race, and it’s hard to tell what they are chasing. Five out of six companies saw their stock prices fall in 2004—Audacia’s by almost half! Five out of six companies had large inventories at year’s end, and bank overdrafts to match. Four companies jumped into the EC market and are competing heavily, but clearly it takes time to develop new markets and in the end it did little to convince investors that something good was happening. How quickly things change. Will we be hearing from some activist investor groups?

BMF Inc. managed to push a lot of last year’s inventories out the door this year, though they were still left with stock on the shelves (they had a lot of company). They gained about five percent share in both the Eastern and Western markets in Product Y—BMF Inc’s bread and butter, and managed to capture 30% of the EC market in Y. But BMF Inc. continues to be outspent in sales and advertising and ranks at the bottom of the Q/A Index. They appear to be spending little on process improvement, and generally shrinking the company to account for inventories rather than trying to market more aggressively. Small is beautiful, but it’s not good when investors start thinking of your company as a penny stock.

Audacia reminds us of what Bill Clinton told Al Gore at the beginning of the last campaign: “It’s yours to lose, baby.” The ‘B’-behemoth was stuck with enormous inventories at year’s end, and in spite of their heavy borrowing, were unable to avoid a very expensive overdraft. Audacia introduced their Product Z this year, and took all three products to Europe. They own almost a solid third of the lucrative Eastern market, played well in Europe, and continue to grow in the West. They’ve been boosting advertising aggressively and dominate the Q/A Index. But investors ran away screaming, and this giant, with all that weight to throw around is going to have to so some sweet talking next year.

Sammy lost almost half of their Western market this year (two years ago they owned almost a third of the West), and more or less treaded water in the East. Sammy was the only company to clear their shelves this year and avoid an overdraft. But even slight price increases did not offset heavy spending and Sammy’s stock plummeted along with their credit rating. Total revenues fell this year. Those who do not study history are condemned to…suffer the consequences.

Comma took a hit this year, though not as badly as Audacia. Last year Comma caught the rest of the industry napping and had the product Z market to themselves. This year, we guess they forgot to look over their shoulder, and were caught with the second largest overdraft/inventory in the industry. Sales of Z increased in spite of market share loss, and Comma captured a bit more of the Eastern X market. Comma finished the year with the highest stock price and best credit rating. Right now they are competing head to head with Audacia, and though we all know size doesn’t matter, it will be interesting to see how Comma maneuvers in 2005.

Those HOSERS know something and we’re hoping some of those other management teams get a clue. They’re no giants, but HOSERS managed to be the only company to show stock gains this year even with an overdraft and a bit of red on the bottom line. HOSERS made minimal changes in prices, advertising, and sales reps and stayed out of Europe. Could we say that the smart strategy for 2004 was to sit still and let others screw up around you? No, we’d never say that. With the second-smallest company in the industry, HOSERS has to do something to grow the company, but they did something right in 2004 and loyal investors were delighted.

BST cut advertising, raised prices, fired a few sales reps, and tried to sell a very high-priced Product X in Europe. Not too surprisingly, revenues fell, net income went up, products went unsold, and their stock price fell (minimally), and their credit rating dropped. We thought those kind of manipulation tactics went out when they finally caught “Chainsaw” Al Dunlap, but maybe it was worth a try. Some investors hung around to see if the ploy would play, but others saw it coming and bailed out. Another year, another strategy. Last year we called their business model flawed. We hate to repeat ourselves, but…