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STREET WISE by Amey Stone	June 8, 1999

When a stock suddenly breaks above its trading range, it's usually because of a news event: It's being acquired, has posted surprisingly good earnings, or has announced a new Net strategy. But sometimes, no single event triggers a stock's rise -- just small pieces of positive news combined with good promotion that persuades a new crop of investors to step up to the plate.

That's the case with Cinar Corp. (CINR), a Montreal-based company that creates high-quality, nonviolent children's entertainment, including the Emmy award-winning show Arthur, and also develops educational materials. After trading in a range between $20 and $25 for most of the past year, the stock hit a 52-week high of 29 1/16 on June 7 before slipping a bit to close that day at 28 5/8. The 2 7/8 point gain represents an 11% surge over the previous day.

Analysts attribute the sudden rise to a variety of factors. On June 4, news broke that Fidelity increased its equity stake in Cinar's U.S.-traded shares to 12%. Also, a new Cinar show may be picked up when PBS announces its next programming slate on June 9. And several analysts expect some major Wall Street firms to begin coverage of the stock soon. The company has been warmly received by analysts and investors at recent investing conferences, including a Merrill Lynch conference on June 2. The last week in May, analysts came away from a company-sponsored event excited about growth in Cinar's educational divisions and its E-commerce potential as it develops an Internet strategy.

CLEAR FOCUS. "The company is very involved with telling its story," says Adam Shine, an analyst with CIBC Wood Gundy, who rates it a strong buy. "People are taking notice that this isn't just a producer of animation, but a growing integrated entertainment and education platform." He commends Cinar's management for its clear focus. "People were looking for this stock to break out."

Cinar is a play on two trends: One is the increasing demand for high-quality children's entertainment as parents shy away from the action-oriented animated shows currently available for children. The second is parents' willingness to buy supplemental educational products in hopes of improving their children's learning experience.

By playing to both trends, Cinar can grow faster than the sum of its parts, analysts believe. "This is where the education world has to go -- converging education and entertainment," says Michael Moe, director of global growth research at Merrill Lynch. "Learning should be fun. Cinar's strategy represents this as well as anybody's." Some entertainment companies, such as Walt Disney (DIS) and Viacom (VIA), have education divisions, but they are largely an afterthought, he believes. No other company recognizes the opportunity Cinar is grabbing, he says. "It's just a very smart company."

In 1998, Cinar's earnings grew 70%, to $21.8 million, or 67 cents per share, on revenues of $151 million, up 61% over the prior year (figures are in Canadian dollars). For the first quarter of 1999, revenues increased 28%, to $35.5 million, and net earnings increased 23%, to $4.5 million, or 14 cents a share.

VERTICALLY INTEGRATED. Cinar's entertainment revenues come from new productions, from its growing library (sales of reruns, videos, and music), and from licensing and merchandising agreements. Along with Arthur, it produces Wimzie's House (a live-action puppet show for preschoolers), Caillou (a successful animated program in Canada that should be in the U.S. soon), The Busy World of Richard Scarry, and The Adventures of Paddington Bear. The company is vertically integrated, which means it produces, markets, and distributes its programming.

Cinar's educational divisions include High Reach Learning, which sells curriculum materials to day-care centers; Carson-Dellosa Publishing, which sells kindergarten through eighth grade teaching materials mainly through catalogs; and software maker EduSoft, acquired in March, which makes software for teaching English as a second language.The EduSoft acquisition gave Cinar multimedia expertise that it'll use to design an E-commerce and Internet strategy. "My model is calling for earnings to accelerate from this point on," says David Doft, an analyst with ING Baring Furman Selz.

Shine expects the company to report earnings of 83 cents a share in 1999 and $1.02 in 2000. "All the company has done is exceed expectations," says Doft. "All I do is raise my numbers."

ALREADY PRICEY. Even so, the stock isn't cheap. Cinar's price-earnings ratio based on projected 2000 earnings is well above 30. Analysts expect the company's earnings to grow at a 30% annual rate and its revenues at a 50% rate long-term. David McFadgen, an analyst with Griffiths McBurney & Partners, acknowledges that the stock is pricey but wrote in an Apr. 8 report: "Once analysis and consideration is given for Cinar's conservative amortization policy, its track record, focus, growth profile, and earnings visibility, we see further above-average share price appreciation potential."

That was before the surge on June 7, which put the stock near analysts' price targets in the low $30s. But analysts are still positive on the stock. Near-term, Wall Street is expecting more good news out of Cinar. And long-term, the company has a focused strategy for combining education and children's entertainment that seems to make good sense.

Stone is an associate editor at Business Week Online

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