Here is the detail of the PW upgrade:
Sent: Friday, September 17, 1999 6:15 AM
Subject: GTW: Here Comes i-Gateway - Upgrading to Buy
Gateway's Internet strategy is about to undergo a major expansion
centered around a "mega-portal" concept leveraging GTW's
direct/mass customization capabilities. If management can execute
on this strategy, we believe GTW's multiple could see significant
expansion.
Current business fundamentals are robust, highlighted by GTW's
return to aggressive pricing. With a plan to stop collecting
sales taxes and to get the expense ratio down to 12%, we think
GTW can defend and grow its Direct channel share again.
We also met with Apple CFO Fred Anderson. Business conditions are
robust for Apple, and the company is embarking on several fronts,
including lower price points and an internet push of its own.
Apple is also planning to stop collecting sales tax, just part
of the company's effort to ramp the direct business up to 45%
of sales.
Please see the attached .pdf files with notes on both Gateway
and Apple.
Call me at 203-978-9100 if you have any questions.
Don
GTW KEY POINTS
· We believe Gateway's new Internet initiative has the potential
for rapid expansion and to drive a change in investor psychology
and valuation of Gateway. Within two years, we estimate Gateway's
Internet service, built around a new mega-portal, could be valued
between $22-$44/share - nearly as much as the total current
valuation.
· Meanwhile, Gateway's core PC hardware business is performing
strongly. Market conditions for the consumer are robust while
Gateway has a very strong product push coming that will launch PC
products with unique form factors but at mainstream price points.
We believe both an all-in-one design and a lower cost Profile
(small footprint LCD based desktop currently priced at $2200
likely to drop to sub $1600 price points) will be big sellers.
· Management is also focusing on streamlining and simplifying the
business. Reducing product complexity and reduced expense
structure (targeting 12% versus 15% today) will increase
Gateway's efficiency and competitiveness. We believe Gateway is
again ready to defend or gain share in its traditional direct
channels.
· Gateway's newly adopted lower pricing strategy is beginning to
drive better unit growth. Gateway is also in the midst of
reviewing its sales tax policy which has the potential to
eliminate a major competitive disadvantage - since GTW's phone
sales are one of the few that collects sales taxes in most
states.
· We also believe over one hundred incremental Country Stores
will continue to power rapid expansion in the retail channel
with Gateway likely to be the number one retail brand shortly.
· We remain concerned about the potential for secular decline
in PC hardware profitability (although this is not likely to be
the case in the near term for Gateway). But we find Gateway's
"Beyond-the Box" position to be one of the strongest and likely
to enable superior financial returns for Gateway even as PC
hardware profitability erodes in the long term.
· While we rarely like to upgrade a stock again after it has
just made a major move - we find the I-Gateway opportunity for
valuation expansion to be impressive and we believe there is
upside to the near term EPS outlook. Accordingly, we are
raising our Attractive rating to a Buy, designating GTW our
new Analyst Best Call in PC Hardware, and strongly recommending
the shares. We remain a big believer in the Gateway Country
Store strategy and we believe Gateway has become a
re-invigorated competitor in the traditional direct channels.
And just as management changed the rules of the game with
Gateway Country - we believe i-Gateway is as big an opportunity.
We are maintaining our $60 price target (26X 2000 EPS) for now
- but we see the 12 month potential for a doubling in valuation
if the i-Gateway strategy and execution succeeds.
:o)
Drew |
