Gilder Tunes in Gemstar

01/17/2003 12:00 am EST


George Gilder

Founder and President, Gilder Publishing, LLC

Few advisors are as well-versed in technology as George Gilder. His Gilder Technology Report is among the most respected sources of information for both tech investors and technology industry experts. The same applies to his companion service, the Technology Market Advisor, published by Gilder along with analysts Andrew Redleaf and Richard Vigilante. Here's their latest pick.

Gemstar (GMSTE NASDAQ) combines the old economy TV Guide with more modern efforts such as Interactive Program Guides for people with too many channels. The company had nearly collapsed; it has had messy accounting problems and is up to its satellite dishes in SEC lawyers, one reason its stock is priced at pariah levels. And until a few months ago, the company acted as if it were run by a crazy person. In this case, it was the recently deposed former CEO, Mr. Henry Yuen. In 2000, the company acquired TV Guide magazine and related properties in a deal that made Rupert Murdoch’s NewCorp. the company’s biggest stockholder. The resulting neglect of the magazine, combined with the general collapse of ad revenues in a slumping economy, plus accounting scandals and court decisions unfavorable to Gemstar’s aggressive assertion of its patents, are all quite enough to explain the collapse of the stock from its 52-week high near 30 (not to mention its silly-season year 2000 high of 107) to the regions it occupies today. Those are also the reasons we think the stock, now at $3.36, is a great opportunity. There is nothing as hopeful-making as a disaster whose causes are clear and remediable, which is exactly what we have in Gemstar.

“First of all, Yuen is gone. Though the stock got a little pop on his departure, the market has barely begun to price in the importance of that change. The accounting scandals and the SEC probes are unpleasant, but they will end some day. Even the patent reversals are likely to benefit the company in the long run, as reasonable fees will encourage widespread adoption of the program, which actually is showing signs of working. And then there is the magazine, still with a circulation of more than 9 million (although more than 2 million of that is free distribution to hotel rooms and the like). New, publishing-savvy management installed by NewCorp. sees the media properties as the company’s real jewel, which is almost certainly right. It is true that the 500-channel world is problematic for any printing program guide; the flip side is that devoted viewers need more guidance than ever before. As for the TV Guide Channel, it’s getting better, and will have more than $70 million in sales this year.

“So what’s Gemstar worth? The balance sheet is solid, with a current ratio of 1.25 and a quick ratio over one. Long-term debt is less than 8% of capital and coming down. Interest expense is below 1% of even current depressed revenues. There is no danger of bankruptcy. The company is not currently profitable. But despite the depressed advertising market, net losses are accounted for entirely by very high charges for write-downs of intangible assets acquired with the purchase of TV Guide. Earlier this year, the company took a one-time charge of more than $1.2 billion. The other major factor currently suppressing profits is the horrible advertising climate. A success scenario would assume, at minimum, that someday the US economy gets better, that the worst ad slump in memory ends, and that the new management team takes advantage of that rebound. In two years, a Gemstar earning $0.60 a share a year, with the accounting scandals a distant memory, could be reasonably expected to trade anywhere from $7 to $12 a share.”

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