VALUE LINE SEEMS TO BE HEADING DOWN A SIDE TRACK BY ANNA ROBATON

When Value Line Inc. took aim at Morningstar Inc. in 1993 by getting into the mutual fund rating business, the consensus was it faced an uphill battle against its flourishing Chicago rival.

Here it is, five years later, and New York-based Value Line — whose flagship Value Line Investment Survey is considered the bible of Wall Street — still is struggling to make a name for itself in the increasingly competitive fund-analysis field.

Indeed, its efforts to move beyond its core business of rating stocks (including a longtime but little-known presence in mutual funds) have produced disappointing results for investors in the company.

Value Line’s stock, which hit a 52-week low of $33.63 in late August and traded at $41 last week, has consistently underperformed. A $100 investment in Value Line stock in April 1992 would have been worth $167.39 in 1997, vs. $186.03 for its publishing and money management peer group and $189.22 for the Russell 2000 Index, the company concedes in its last shareholder report.

Mounting competitive pressures make it unlikely Value Line will break out of its doldrums anytime soon. It must contend with an explosion of financial information on the Internet, rivals who have sold out to richer backers and, ironically, a growing push into its traditional backyard by Morningstar, which last year began rating individual stocks.

Founded in 1931 by Arnold Bernhard, and run since 1988 by his daughter, chairman and chief executive Jean Bernhard Buttner, 63, Value Line seems a classic case of a company that’s ripe for acquisition. Perhaps that’s why it’s owned by such prominent value investors as Gabelli Funds, Royce & Associates and Tweedy Browne Co. LLC.

“From a stockholders’ standpoint, it would be nice if the company had been a little more opportunistic or timely in its expansion strategy,” says Charles M. Kulp, managing director of New York-based Dominick & Dominick Advisors Inc.

Ms. Buttner declined repeated requests for interviews. But the company says in a statement: “We are perfectly positioned to take advantage of” growing demand for print and electronic research. “Other firms do not employ an army of research analysts like we do.”

Despite the stock’s less-than-stellar returns the past few years, Ms. Buttner was paid about $1.4 million in fiscal 1997 and $1.2 million in fiscal 1996. About the same time, she won a nasty public fight with her twin, Arnold Van Hoven Bernhard, for control of the company.

Under a settlement, the firm bought out Mr. Bernhard, who had sued to dissolve the company. Ms. Buttner now owns all the outstanding voting stock of Arnold Bernhard & Co. Inc., which, in turn, owns about 80% of Value Line’s stock, according to a Securities and Exchange Commission filing.

In spite of the last decade’s bull market, Value Line has seen its revenues grow only modestly — up 2%, to $93.6 million, in the fiscal year ended April 30, vs. a rise of just 5% in fiscal 1997.

Net income had risen 9% to $45.5 million in fiscal 1997 — a whopping 50% net profit margin — but dropped almost 23% during fiscal 1998 to $35.2 million. The company attributes the decline to a special $150 million dividend paid out in early 1997 as part of the ownership settlement. The dividend reduced the size of the company’s securities portfolios, which took a bite out of its money management fees.

Subscriptions from more than 100,000 customers account for about 65% of the company’s revenues. The news here is not great: Total subscription revenues were down 2% in fiscal 1998, while revenues for the famed Value Line Investment Survey were flat.

Value Line says in its statement that its competitive advantages include its highly regarded research analysts and information on 1,700 stocks and 8,000 mutual funds: “To our knowledge, no other firm offers such information on both stocks and mutual funds. Not Morningstar, not CDA (Wiesenberger), not Standard & Poor’s, not anyone.”

Most everyone agrees. “It’s still the best quality statistical service available,” says Mr. Kulp. “The analysts work hard to do a good job and a sound job on the companies they follow.”

heir-less leader

Striking back at competition ushered in by the Information Age, Value Line has rolled out electronic versions of its print research products, which in some cases has cannibalized sales. Subscribers to the print version of its Value Line Mutual Fund Survey, for instance, have been moving to the software alternative, according to the company.

The firm declines to release specific circulation figures, but cites a “dramatic increase” among institutional customers for its fund ratings, thanks to a growing demand among financial planners and brokers. Also helping: The fund survey has gotten some good press reviews lately.

Its competitors, however, aren’t too worried. Unlike its rivals, Value Line shies away from media attention — a decided marketing minus.

“They are on our radar screen, but they are just not very apparent,” says John Rekenthaler, a senior analyst at Morningstar. “They don’t appear to be investing heavily from the developing and marketing standpoint.”

The notoriously frugal Ms. Buttner gets kudos for holding down costs, but her caution appears to be at the expense of robust growth.

If Value Line is to become a bigger player — especially in the money management business, which can have even higher margins than publishing — it must devote significantly more resources to marketing. In fiscal 1998, its total advertising expenses actually dropped 4% to just over $15 million.

The firm rolled out the first of its 12 no-load mutual funds, its flagship $315 million Value Line Fund, in 1950. It began managing separate accounts in 1979. Today, it has about $5 billion under management, which includes $2.1 billion in mutual fund assets (sold directly and recently added to supermarkets).

After 40 years, Value Line’s fund family ranks No. 150 among 613 families tracked by Boston-based Financial Research Corp. The company concedes one of its biggest challenges is “grabbing the attention of investors when giant firms like Fidelity are spending tens of millions on advertising,” but says it intends to increase its market share by “delivering outstanding investment results versus our peers.”

That record is mixed, however.

Its five-star Asset Allocation Fund handily beat its peers for the 3- and 5-year periods by more than six percentage points, returning 17.21% and 17.39%, respectively, through Sept. 11, according to Morningstar figures.

Meanwhile, the Value Line Small Cap Growth Fund has been among the weakest funds in its category, losing 20.56%, 29.18% and 2.25% for the year-to-date, 1- and 3-year periods, respectively.

A bigger issue: Ms. Buttner doesn’t appear to be grooming an heir.

“It is such a tightly controlled company that if she retired tomorrow, I can’t believe the company would maintain its present structure very long,” says W. Bradford Hatry, a former regional marketing manager for Value Line who now is director of marketing at New York’s Ascent Asset Management.

“There are a lot of very capable people in management,” Mr. Hatry adds, “but no one has been groomed to be the successor CEO.’