Handleman (HDL) reports earnings -- Time to catch a falling knife?

I've been following Handleman (NYSE: HDL) from the sidelines -- literally for years -- wondering how much lower the stock could fall. In late July, I wrote that super-investor Marty Whitman had acquired a large stake in the company. Since then, the stock has continued its march of death and investors can again ask "Is the stock done tanking?"

The company reported its first quarter results for FY 2008 today and, while they're certainly not impressive, they may be a sign of some positive things to come. The company's pre-tax loss was $17.7 million, compared to $22.4 million in the same quarter last year. However the company booked a tax benefit of 16.5 million in the prior year quarter, so the comparables don't look good. The total loss for the quarter was 88 cents per share compared with 30 last year.

CEO Stephen Strome commented that in 2007, the company implemented "programs" to save $20 million per year, and will add another $20 million to that savings this year.

Total revenue increased 14% to $274.2 million, giving the stock a minuscule price/sales ratio to go along with its tiny price-book ratio. Now if only they can do something about the lack of a price/earnings ratio.

Gross margins improved slightly, and the company is looking to transition away from dependence on the dying business of music distribution into greeting cards, video games, and DVDs. Handleman is hoping its expertise in logistics and category management will help it make in-roads in these and other products.

Will it work? Only time will tell but, if it does, investors will be richly-rewarded. The stock is trading right around its net asset value, and may present an opportunity for patient investors who aren't afraid of uncertainty -- which is exactly what Whitman is, and probably a key reason his firm is invested.