Plantronics (PLT) Notes.
Last night my club discussed PLT, which we bought in the fall of 1999, rode it up and watch it fall hard. We used the newly adopted cover sheet (pasted below - lengthy and lost it's formatting). Our SSG showed a "hold" with 14% EPS growth (ratched down because of their warnings) and a low price of $13. It had a up/down of 1.4 to 1.
Then there were these things from PLT's announcement yesterday.
- Revenues fell about 20 percent
- Lowered its second-quarter numbers
- Sees second-quarter earnings per share of 10 cents to 14 cents vs. expectations of 25 cents!!
- Said it won't update its targets during the quarter
PLT is down nearly 7% this morning on higher than usual volume.
The really bad news? I couldn't find anything to be positive about PLT so I proposed we sell but the motion was narrowly defeated.
Sigh.
Lunar Cover Sheet - PLT
Presenter Kris and Alan Date July 16 Company/Symbol Plantronics, PLT.
1. Why are we discussing this stock? It’s had a major sales and earnings increase in 2000-1, but then a big earnings hit in the last quarter and the stock has been punished. What’s happened and do we keep it?
2. What do they do and how do they make money? (Crayon Test) PLT makes headsets for call centers, mobile phones, computers, and other devices.
3. What have you checked/provided? Annual Report ___ 10K _X_ S&P___X VL ___X 1st Call Earnings ___ X S&P Industry ___X_ stock chart ____X Fundamentals/information compared to sector from: SmartMoney___ X Quicken.com___X 10Kwizard.com___ MSN___ Forbes.com___ X BusinessEthics.com___X Merrill Lynch reports ___X
4. Reason for difference between sales and EPS growth (if any)? 5. Anticipated source of future growth? 6. If stock price has dropped, why?
S and P: The Bad News: 1. expects revenues to drop 9% in 2002 as cell phone ,computer headset, and call center markets slow due to crummy economy. 2. In the high margin call center market in Europe and N. America, PLT believes the primary source of future sales will be repeat sales to existing customers rather than many new customers. But the developing world use may increase call center use. 3. S&P lowered EPS for 2002 to .98 from $1.35 for 2001, a 29% decrease. 4. With slow econ., they downgraded PLT to hold from buy.
Good News: 1. PLT is still well positioned to emerge as a leader in relatively virgin markets for cell and computer headsets when the economy improves and when voice recognition and PC conferencing increases. However, these offer narrower margins but will drive growth for several years. 2. PLT is repurchasing shares: 600,000 in 2001 already. 3. Company has no long term debt.
Merrill Lynch: Good News: 1. New earbud-style product is now available 2. The New York state ban on using cell phones while driving should raise sales of headphones 3. PLT said it’s now the leading independent mobile headset provider (although the market is still dominated by handset vendors)
ML Bad News: 1. Mobil headset markets have lower margins than call centers. 2. Call center revenues (74% of 1Q revenues) “face near-term challenges”. 3. ML has a neutral short term and accumulate long term rating, and dropped their 2002 EPS to .87. ML believes revenues will be $367 m. in 2002, down 8%. 4. PLT said its competitors have started “more aggressive pricing”.
PLT’s 10-K, June 1, 2001 1. “While we don’t have a cyclical business, our sales are affected by overall economic activity. In Q4 of 2001 we saw an overall drop in demand. We believe this drop is not caused by competitors taking market share.” 2. “While call centers are still a large portion of our business, our future prospects will depend on demand for mobile, computer, residential, and office markets. We don’t have extensive experience in these markets….”we may have benefited from a short term bubble in call center demand.” 3. “Our biggest competitor is GN Netcom, a Danish telecom conglomerate which is acquiring other companies in the headset business such as Hello Direct and Jabra co. This may cause us problems because we have a multilevel distribution model while they will be able to sell directly and lower their prices.”
4. Competitor Labtec (Vancouver, Wa.) was just bought by Logitech, a computer accessories co, which gives Labtec greater resources to compete against us. 5. “We’ll face more competition from companies who now don’t offer headsets. These are manufacturers of mobile phone and computer peripherals. These companies may have greater resources and may bundle headsets with their products. 6. We’ll face Far East competition where companies offer very low cost headsets, including copies of our products.”
7. “Cordless and wireless products may require us to develop new technologies. 8. Our sales growth in2000-1 may be unsustainable—it was delayed spending from Y2k and internet companies gearing up.” 9. Almost all of their manufacturing is done in one location, Tijuana, making it susceptible to political unrest, earthquakes, dollar fluctuations, or other disasters. 10. PLT’s relationships with their resellers are nonexclusive and can be terminated by either party without cause. “Our channel partners also sell or can potentially sell products offered by our competitors…. (and) such partners may decline to carry, de-emphasize or discontinue carrying our products.”
Headsets, still a hot market but only 12% of PLT sales, will become a commodity with dropping margins: Real Money 6/28/01 “PLT will not necessarily cash in on the new law in NY banning cell phones while driving. Headset sales accounted for only 12% of sales. Sales overall have slowed so much that the company issued 2 earnings warnings in the March quarter. Tom Chanos, Badger Consultants, calls it a one-hit wonder and has a sell rating. Its gross margins make it extra vulnerable. ‘While falling for two years, they’re still a respectable 50% which means they have plenty of room to drop as competitors with lower prices enter what may very well evolve into a hot market for commodity product. ‘”
7. What is the Fair Value (from S&P, Quicken, others)? $15.30 (S & P), outlook 1+, ***(hold)
8. Does the company have a sustainable advantage gained through business momentum, patents, a quasi-monopoly, visionary leadership, a proprietary product, new technology, great management and/or inept competition? It seems they had momentum, have high quality products and good service, but they don’t have a proprietary product or unique technology that would prevent new entrants into their markets.
9. Is the company part of a paradigm shift (e.g., connectivity, mobility, interactivity)? Yes, in usage—more people using headsets with mobile phones, home phones, and computers. But there is no shift in new technology. In fact, PLT’s 10-K warns: “technological advances such as automated interactive voice response systems could reduce or eliminate the need for call center agents in certain applications….and consumer resistance to telemarketing could materially adversely affect growth.”
10. Does the company compete on something other than price? See # 8 above. With increased competition and “commoditization,” they will have to lower prices to compete.
11. Is there relatively low analyst coverage? Yes; only two analysts?
12. Does the stock have excellent past share appreciation, measured by a relative strength of 90 or higher? No: 40.
13. Are the Gross Margins at Least 40%? Yes, even close to 50. But they may come down for the non-call center products. Are the Net Profit Margins 10% or greater? Yes, 18%
14. Is the future PE less than 30? Yes, around 23 Is the PEG ratio below 1.0? No: 1.3 (If not, what is the compelling reason to buy now?) 15. Is the 200-day average on an upward trend? No, been steady downward
16. Am I being patient? Perhaps too much! We ignored two warnings. Has a base formed of 5-7 weeks? Yes, stock has been falling since mid-Feb.
17. Debt levels? Zero-term debt.
18. Timing: Pert Analysis may have showed us a business in trouble. See Attached article from the Motley Fool, May 29, 2001, “How to Miss A Perfect Sell”. The author missed three classic warning signs: 1. excessive valuation of the business 2. inventories and receivables increasing much faster than sales and 3. a sudden drop off in operating cash flow. |
