K2 Stock Price Not in Line With Its Earnings Growth.

WHILE its financials have been solid for several quarters, L.A.-based sporting goods manufacturer K2 Inc. is experiencing a stall in its stock because the industry has fallen out of favor on Wall Street.

With all the attention going to Internet companies, shares of sporting goods manufacturers have taken a back seat in recent months. According to an index kept by Yahoo! Finance, the earnings of 31 companies that offer leisure and recreation products is expected to grow by 8.1 percent this year, compared to an earnings increase of 11.3 percent for the entire S&P 500.

For about a year, K2 shares have bounced between $8 and $11. It was trading toward the lower end of that range last week, closing at $8.19 on Nov. 16, and down from a high of $32.94 in 1997.

"K2 certainly is paying for the lack of interest that the overall (sporting goods) industry is generating," said David Leibowitz, an analyst with Burnham Securities in New York. "It's not viewed as a growth vehicle at the moment -- it's certainly not a high-tech industry and it doesn't have `dot-com' at the end of its name. The company doesn't lack for business, it's simply a group that's out of favor."

For the third quarter ended Sept. 30, net income was $3.3 million (20 cents per diluted share), compared with a net loss of $8.4 million (51 cents) for the same period a year ago.

(For the third quarter of 1998, K2 took a pre-tax $14.5 million charge related to restructuring of its bicycle business.)

K2 manufactures a wide variety of sporting goods, including inline skates, snowboards, ice skates, skateboards, bicycles, skis and fishing equipment. Its major manufacturing and distribution facilities are scattered around the world, including Japan, Hong Kong and the United Kingdom. The company employs 3,200.

"K2 is focused on product innovation," said Chief Financial Officer John Rangel. "Our performance products target the sports enthusiasts and the wannabe enthusiasts."

Spending for research and development has increased steadily over the years, from $9.3 million in 1996 to $12.4 million in 1998.

One of the products that came out of its R&D sector was the SoftBoot inline skate that came out in 1993. Instead of the standard inline skate that resembles a ski boot on wheels, the SoftBoot product looks more like a hiking boot.

K2's inline skate sales total more than $100 million, Rangel said. Shipments of inline skates for the first three quarters of 1999 were up 11 percent over the like year-earlier period.

Within the past 18 months, the company has introduced several other advances to its product lines. Late last year, K2 released a version of the inline skate that has hinged wheels on the bottom. This allows skaters to take longer, more powerful strides when they start out.

K2 has been successfully defending its inline-skating turf. Since 1998, French sporting goods manufacturer Salomon S.A. has been trying to introduce its TR II brand of inline skates in this country. K2 sued for patent infringement in December 1998, claiming that Salomon' s TRII line of soft-upper-style skates violated K2's patent. K2 won a preliminary injunction prohibiting Salomon from making or offering for sale its TR II skates in this country, and earlier this month, a federal court in Washington extended that injunction. The case is scheduled to go to trial in February 2000.

Not all of K2's growth is coming from internal operations. In October, K2 acquired Ride Inc., a Preston, Wash.-based designer and manufacturer of snowboard equipment, apparel and accessories. The deal was completed as a stock-for-stock merger, with each Ride share converted to one-tenth of a share of K2 common stock. The acquisition was valued at $12.4 million.

And in March, K2 acquired the trademark name from Morrow Snowboards Inc., and K2 now produces a line of snowboards under that name.

K2's products are sold at a wide range of stores. Its Shakespeare brand fishing equipment retails at Wal-Mart and Kmart, while its more-expensive inline skates and snowboarding equipment is available at Sports Chalet, Sport-Mart and other specialty shops.

This kind of product diversity bodes well for the future financial health of K2, Leibowitz said.

"This is a company that has gone well beyond skis," Leibowitz said. "They have built up a rather strong market position in other active pursuits and have positioned themselves to take advantage of consumer trends."

                                  K2 Inc.
YEAR (Dec. 31)                 1998  1997
Net Sales (millions)           $574  $559
Operating Expenses (millions)   418   391
Operating Income (millions)    16.7    37
Net Income (millions)           4.8  21.9
Earnings Per Share            $0.29 $1.31

SUMMARY

Business: Sports equipment manufacturing

Headquarters: Los Angeles

CEO: Richard Rodstein

Market Cap: $140.6 million

Dividend Yield: 5.18%

Total Liabilities: $127 million

P/E Ratio: 35.9

Long-Term Debt: $110.7 million3