Dear Mr. Berko:

What do you think of Water Pik Technologies? I might like to buy the stock. Please give me your thoughts.

J.S., Davenport

Dear J.S.:

Water Pik Technologies (PIK-$13.65), a November 1999 spinoff from Allegheny Teledyne, is a small player in the household products industry, competing against a large number of huge, healthy, wealthy and aggressive rivals. Revenues last year were $305 million and its market cap is about $170 million. Those numbers pale in comparison with companies like Newell Rubbermaid with $7.7 billion in revenues and a market cap of $6.5 billion, Gillette with $9.2 billion in revenue and a market cap of $37 billion, and Clorox with $4.2 billion in revenues and a market cap of $10.5 billion.

PIK, employing 1,500 people, is home-ported in enchanting and seductive Newport Beach, Calif. Best known for its Water Pik products, the company designs and sells an impressive variety of shower heads under names like The Original Shower Massage, Cascadis, AquaFalls, New Visions and Full Body Shower Panel (a spa-like shower), that range in price from $50 to more than $600.

PIK has a very respected line of oral- and dental-care products that have the imprimatur of the American Dental Association. These and more than 600 other dental products, used by dental professionals, are marketed in more than 60 countries. PIK has a sexy line of body massagers, foot spas with reflexology and ergonomic elements, plus aromatherapy baths for feet.

The company makes water filtration systems – faucet-mounted, beneath-the-sink or refrigerator-attached – plus filters and replacement cartridges. Then there’s the Jandy and Laars brand pool and spa products, which include electronic controls, automatic pool cleaners, pumps, pool and spa heaters, valves, actuators and other associated plumbing products. PIK also markets waterfalls, rock falls, fountains and decorative pool toys, games and related accessories. PIK’s products are considered to be among the best and most reliable in the market.

Unfortunately for shareholders, this potentially magnificent company lacks the ability to capitalize on its sterling reputation for quality, its innovative products and designs, its instant brand recognition and a rapidly growing market.

In the past four years, revenues ($305 million in 2003) painstakingly inched forward at less than 2.5 percent a year and net income of $10.9 million is a miserly 3.5 percent of sales. However, PIK’s balance sheet is as fresh and clean as a newly laundered dress shirt. This “value” stock has almost no debt, sacks of cash and 12.4 million shares out and trades at 1.6 times book value.

Its return on assets is an embarrassing 2.8 percent vs. the industry average of 11.8 percent, its return on equity is a paltry 5.1 percent vs. the industry average of 29.6 percent its net profit margin of 3.5 percent is one-third the industry average of 11.7 percent and each employee contributes a stinting $7,000 to the bottom line. These are terribly unsatisfactory numbers for a company with such a fine product line.

The only reason I’d consider owning PIK is that companies like Newell Rubbermaid, Gillette, Avery Dennison, Fortune Brands, Clorox, Procter & Gamble, Kimberly Clark, etc., might find PIK to be a comfortable fit to their product lines. They may look at PIK as a ruby in the rough that can be polished to a bright shine. Without a doubt, these companies have the marketing savvy, financial power and retail influence to ramp up PIK’s revenues while significantly improving the company’s ratios.

PIK doesn’t pay a dividend even though it certainly can afford one. Book value continues to grow every year but return on assets continues to decline, as does its gross margin, and PIK’s price-earnings ratio is 40 percent less than that of the prevailing Standard & Poor’s 500. Certainly the PIK people have a lot of reason to reduce their expenses or send their executives back to management school.

That aside, I think Robert Bozzone, the 70-year-old chairman, is too old and too complacent in his job. Michael Hoopis, the chief executive officer who earned $900,000 last year plus 10 percent of the company’s net income, certainly hasn’t earned his keep, his company car and his expense account. It seems that many suits on Wall Street might agree with this assessment. Few institutions own PIK shares and the trading activity averages less than 10,000 shares a day.

I’d certainly not buy the stock because management will put some spark into revenues and earnings. They couldn’t do this in the past four years so there’s no reason to believe they will do so this year or next. I’d consider the stock only because of a remote possibility that a larger competitor or a leveraged buyout firm might see potential value and decide that there’s ample opportunity to significantly increase that value.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.