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It's starting to be a common occurrence: Normal-looking people, often in business attire, talking in animated voices and gesturing with their empty hands while they walk down the street -- alone. No, these folks aren't crazy, just early adopters of the latest fad in cell-phone gadgetry: the mobile headset.
Handsome growth of the hands-free devices has been fueling a nice run in the stock of Plantronics (PLT), the leading maker of communications headsets. The stock traded as low as $43 last September after it posted disappointing quarterly results, but it has since been on a fairly straight upward trajectory. While most technology stocks are still clawing their way back from the slide in March and April, Plantronics has simply bounced around in a narrow range between $85 and $95 in the same period. But in the last two weeks, after the company completed an oversubscribed secondary offering, the stock jumped, adding 2 1/2 points on June 27 to reach a new high of $98 5/16.
The growing popularity of mobile-phone headsets is probably the sexiest part of the Santa Cruz (Calif.) company's investment story. The mobile angle prompted money manager Kenneth Shapiro to buy the stock for accounts at his firm, Condor Capital. Shapiro believes legislation requiring use of hands-free devices when talking on car phones will spread. Other analysts believe safety concerns -- related both to driving with two hands on the wheel and moving the phone's power source further away from the user's brain -- will prompt people to snap up the devices.
FUTURE POTENTIAL.
The other sexy part of Plantronics' story is the role the company plays in the expanding market for PC communications. Plantronics has products that improve speech-recognition technology and Internet telephony. Headsets that feature those technologies could benefit from the future growth potential of voice-activated gaming or downloaded music files, to name just two possibilities. Plantronics is also introducing wireless hands-free headsets for the home, a market the company's CEO, Ken Kannappan, calls "embryonic."
But it's misleading to focus just on these fledgling businesses. While Plantronics is experiencing triple-digit revenue growth in mobile and PC headsets, those two divisions accounted for only 9% of its $92 million in sales in its fiscal 2000 fourth quarter, which ended Apr. 25. The bulk of the company's current sales comes from its office and call-center divisions (the traditional market for headsets used by pools of telemarketers and customer-service reps). Merrill Lynch analyst Tim Long estimates that Plantronics has a 40% to 50% market share in call-center and office headsets.
While the call center is a fairly mature market, headset use in offices is just catching on. Kannappan estimates that only 3% of the 200 million workers worldwide (and 7% in the U.S.) who talk on the phone more than two hours a day have headsets. Plantronics' office division is growing 20% to 25% a year, he says. It was mainly that side of the business that landed the company at No. 33 on Business Week's latest annual list of the 100 Hot Growth Companies.
KILLER MARGINS.
Because Plantronics has focused on making a premium product for corporate customers, it boasts profit margins that David Walrod, an analyst at McDonald Investments, calls "phenomenal." The company's gross margins in fiscal 2000 were 58.9%, and its operating margins were 29.6%. Kannappan says the company should achieve operating margins of 29% to 30% in the current fiscal year, and analysts project earnings to grow about 20% a year. The company is nearly debt-free and churning out cash, part of which it recently used to buy back 100,000 shares.
The biggest question for Plantronics investors going forward is whether the company can maintain those juicy margins. Only in the last few years has it expanded into retail markets, where its products have slightly lower margins (but most likely higher sales volume). The real potential problem is competition.
At $700 million, the current market for headsets is tiny and highly fractured. More aggressive, smaller companies are eager to get into the hot new mobile and PC markets. And because designing and manufacturing headsets isn't high-tech, there are few barriers to entry. Most of its rivals have introduced cheaper and, Plantronics claims, lower-quality devices. In the all-too familiar pattern with consumer electronics, competition could drive down prices and erode Plantronics' profit margins. Of course, if someday nearly everyone who talks on the phone uses a headset, the market will be so large that Plantronics will need only a little share to enjoy huge growth, Long says.
EDGY COMPANY.
Kannappan says Plantronics has the focus and superior products to maintain its edge. "We take headsets very seriously," he says. "We are totally committed to them." He points to the company's superior comfort, acoustics, and durability. Analysts believe that while customers may buy a cheap mobile headset for a test run, they'll trade up to a Plantronics product once they're sold on the technology. Another potential safeguard for investors: Rather than trying to compete head-on, a large electronics company would be smart to acquire Plantronics, Walrod says.
In fact, concerns about competition and market share may be premature at a time when Plantronics is just starting to show up on Wall Street's radar screen. Many investors missed it because of its small market cap and niche strategy -- and also because it's a hybrid of electronics and telecommunications. "It's sort of a nontech tech play," says Shapiro, who thinks the company's price-earnings multiple of about 22 times expected earnings in 2001 is attractive in the current market. "Obviously, it feeds off the tech sector, but it's not in a high-tech business."
Plantronics had been making headsets for nearly 40 years before the market for its products suddenly expanded to mobile phones and PC communications. "Very clearly, these markets have come to us," Kannappan says. Now the company has to prove to investors that it can make its headset expertise pay off in a new world.
Amey Stone covers investing for Business Week Online
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