Stock down, but company might appeal to a buyer

Hope seen for Charles & Colvard

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CORRECTION

An article about Charles & Colvard in the Business section Wednesday incorrectly reported the amount of the company's financial loss for fiscal year 2007. The loss was $24,424.

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Charles & Colvard investors, who have seen the company's stock crushed in the past year, got a glimmer of hope Tuesday when an analyst suggested the jewelry maker could be an acquisition target.

Eric Wold, managing director of Merriman Curhan Ford in San Francisco, said that though Charles & Colvard's sales have suffered in recent quarters it has a lot of value to offer a potential buyer.

Wold wrote that Charles & Colvard's inventory of moissanite gemstones is worth about $43 million, but has a retail value of about $157 million. The Morrisville company's current market capitalization is $23.18 million.

"There are a number of potential acquirers including other jewelry companies or retailers that want exclusive rights to moissanite jewelry and who believe they can build a brand through their own stores and advertising," Wold said in a telephone interview.

The company's low share price -- its stock has declined 81 percent in the past year -- helps to make it a bargain. On Tuesday, it traded as high as $1.38, before closing at $1.28, up four cents.

"When consumer stocks decline in weak economies such as this, it becomes easy for larger consumer companies to acquire other brands at depressed valuations," Wold said.

In addition, the jewelry industry is ripe for buyouts, said Hedda Schupak, editor of JCK Magazine, which tracks jewelry industry news.

"The lion's share of the jewelry industry is still made up of independent and family-owned businesses," Schupak said. "There's plenty of room for consolidation.

"[Charles & Colvard] is a well-managed company. It would not surprise me that someone would want that company," she said.

Based on current valuation of Charles & Colvard's assets, Wold estimates that it would fetch as much as $3 to $5 per share, a premium of 131 percent to 285 percent.

"When you are public, you are for sale every day," said Bob Thomas, president and CEO of Charles & Colvard. But he added that the company has not received any offers.

Thomas said the company is looking for ways to improve sales.

The company lost $24.4 million in 2007, compared with a $6.1 million profit the previous year. It has tried to boost interest in its man-made gemstones, which are sold at major retailers such as J.C. Penney, Kohl's and Zales. But lackluster sales the past two years have led to an inventory glut.

"We know consumers love moissanite jewelry, and it will succeed over time," Thomas said. "But we know that we have short-term issues, and we are looking for opportunities to gain positive revenue momentum."

Charles & Colvard has hired a Philadelphia consultant to assess its business and recommend improvements. Thomas said that report should be ready by April and likely will lead to changes.

In the meantime, Wold's report offered some solace to disappointed shareholders who have seen the stock fall from a high of $25 in December 2005.

"It takes a fresh look at a company that people have only watched the sales go down," said James Mullins, portfolio manager with D.L. Carlson Investment Group in Concord, N.H., which has owned Charles & Colvard shares since its initial public offering in 1997.

"It gives a little hope," he said.