David:
My take on SPTR is a little different that what you have
been hearing on this thread. I subscribe to the philosopy
that invetsing is both an ART as well as SCIENCE.
I will refrain from giving any investment advice there.
RJ - Ray Jaeger, Chairman and CEO of SPTR
The sci part involves analysis of the financials of the
company, i.e., income statement, balance sheet, as
well as statement of cash flows. The art part is the
"touchy-feely" part.
Science part:
I do not have all the numbers with me but do have them
at home.
In general, this quarter the gross margins have fallen to
close to 38% range. SPTR's expalnation has been
higher start-up costs that they have included in cost
of sales. Sounds like a reasonable explanation if
you are the trusting type. My experience is that fallling
gross margins at manufacturing companies are one of
the early red-flags of surprises ahead. If you believe
that stocks are priced based on their future earnings
stream then pay careful attention to this.
A very common reason to falling gross margins is pricing
pressure on the widgets you make and sell. Often the
pricing pressure comes about due to an imbalance in
supply/demand equation. At least I know for certain
that there is a supply/demand imbalance and pricing
is under pressure. Corning has stated so in its
conference call, been in the press, and SPTR has
confirmed this. It is not just a rumour. But I am not
in a postion to quantify it. So, the best I can do is watch
for early indicators that tell me the potential impact going
forward.
In SPTR's prospectus for the secondary, as well
as 1Q97-10Q and 2Q97-10Q, in the MD&A section
they have stated that increasing prices is
one of the reasons that their gross margins have
been rising. Vis-a-is 1Q and 2Q their margins have
fallen in 3Q. What are the implications ? Is it just
the higher than expected costs for the expansion ?
Also, the gross margins are the highest for the
communications division, followed by the specialty
products, followed by APD (prospectus for secondary
as well as 96 10K). Well they got rid of APD the least
profitable part of the business (I know it is a 50-50
partnership) so to me as an investor that is good news
as higher margin businesses are now left. So higher
margins will translate to higher earnings which
translates to higher stock prices. Just the opposite
has happened. The trend over the last 4-5 quarters
was rising margins. The trend has changed. Is this
reversal of trend transient, or is it an indicator of what
you can expect to see in future. Except that in future
mgmt may come up with another exuse.
When you have pricing pressure and gross margins
fall, two of the most common ways to dig yourself
out of this hole is
(1) slash prices and increase your sales (a la INTEL,
COMPAQ, DELL etc), and/or
(2) increase operating efficieny.
Let us first take increasing
operating efficiency, which translates to holding
down or reducing sale & marketing expense, closing
down non-performing offices, layoffs, mfg process
improvements, better yields, or just making more
efficient use of your resources. SPTR has had
flat sales for the last 4-6 quarters due to operating
at maximum capacity and yet to their credit they
have increased margins. How ? The answer to this
question can be found in their own 10Q's of 1996
and 97 as well as 96-10K and prospectus. They
have stated that they have improved margins by
improving operating efficiency. This simply means
that their ability to squeeze more returns out of improving
operating efficieny is fairly limited going forward. This
leaves them with increasing sales as a way to respond
to falling prices. I don't see how they can win
a pricing war with GLW and LU, much less when
they are your biggest customers. SPTR is no Intel,
Dell, or Compaq. Since the operate on long term
contracts, I fail to see how they are going to increase
sales significantly without having signed new contracts.
Also, there is one other reason their GM may be under
pressure. They got in to single mode around 1993
but it was not until the last few quarters that they
stablized their mfg processes and got into volume
production of single mode. In the annual meeting
or may be in a 97 10Q they have stated that now
their unit volume of single mode is approaching that
of multi-mode fiber sales. They have also stated that
multi-mode has higher margins than single mode.
Could the rising volume of a lower margin product
have caused a decline in gross margin and not
just rising expansion costs ?
I will make the point that 37-38% gross margins are
still at the high end of their range over the last 3 years
or so.
David, when you read a press release, remember
what is _not_ said is as important, if not more, than
what _is_ said. They very clearly stated at
the shareholders meetring the the first big sales
increase from the comm fiber division will be
seen in 1Q 98. This was I believe 30th May 97.
I attended this one. Well in the press release
dated Sept 11, second para reads as follows:
"Although additional capacity at the Communication
Fiber Technologies will not be available until 1998
..... ".
When in 1998 ? 1Q or 3Q. The absence of firm time
frames has introduced uncertainity. Also, in the
3Q earnings press release no mention has been made
of how the progress on the expansion of the comm
fiber division is going. On schedule or not ?
Was the Raymond James analyst following the
company told something that caused him to
downgrade the stock after 3Q earnings ?
Also, in the same press release"
Jaeger continued, "Our multi-year contracts are still in
effect and we have every reason to believe they will
be honored. We have recently received confirmation
of Lucent technologies multimode fiber requirements
under our supply contract with them, which are at
anticipated levels. We are currently in disscussions
with Corning regarding the supply for the 4th quarter
of this year and 1998 under our supply contract with
them. We expecty to conclude these discussions
in the coming weeks"
Let us read between the lines here. Has LU locked
themselves in for 4Q 97 and all of 98 ? pretty vague
statement IMO. What about GLW, it is now mid-Nov,
what has happened with GLW have they signed on
the line yet ? I don't know and it is making me think
hmmm..... Any responsibility to investors that got in
at the secondary at $19.00 maybe ?
BTW, I have been following SPTR since 4Q 1994 and
accumulated over the fall of 1995. I am out of it
now but may get back in.
Now, most of the capacity increase in going to be
in single mode, as they have stated. As per their
statements (96 10k & prospectus) they are targeting
emerging markets like China, India, and SE Asia with
single mode fiber. Around 25% of their sales are foreign
sales. A conservative opinion would say that their abiity
to sell all this new capacity coming on stream in
1998 (I wish I knew when in 98) to SE Asian nations
will be impacted. A more positive opinion will be that
these nations will not delay their communications
infrastructure projects lest they fall behind in their
plans of building little Silicon Valleys everywhere.
Clearly there is uncertainity there. My opinon is
there will be some impact but not an earnings
showstopper that will persist.
Also, the 100% increase in fiber production will be
largely single mode which has lower margins.
What does that do to margins going forward
with the change to the product mix ? Most
likely lower ? May be they will compensate
with higher sales since they will have this
increased capacity.
Contrary to opinions that have been expressed
here I believe that going to capital markets was
well timed and well executed. Sometime in fall 1995,
before many of you were aware of SPTR, RJ had stated
they will go to capital markets (in a conf call) for more
funds to expand but that the stock price was too
low. It was in the 6-7 range then. So it was planned
and people that were following SPTR were aware
of it then. Also, I like the fact that they have taken
on a combination of debt and equity for expansion
as against all debt or all equity. As long as they
manage the money well. They have 24 million in
long term debt, and interest payments start Dec 1999
I believe. Will eat into profits for sure. The point is
you have to give them credit for pulling off the secondary
in the short window that they were given by the market,
issused Senior notes and expanding. Whether you agree
with it or not, they said they were doing it and they are
executing against their plan. They are better positioned
as a company going forward than they were 2 years ago.
However, if the market will give them a better valuation
is the real question. If they show the earnings
the market will reward them. They have more cash in
the kitty now. Gen Cable tie-up may pay off. Instead
of spending money on hiring expensive technical sales
folks they now have a much better distribution capability
they they could have ever hoped for. RJ stated this at
the annual meeting and I agree. LU royalties will go
away end of 97 and GLW by the end of 99, if I recall
now. Also, they claim that their single-mode fiber is not
subject to royalties. As they make more of this, a much
less %age of sales will be subject to royalties.
Contray to opinon expressed here optical fiber is not
a commodity product. Yes it is produced in volume
but IMO that does not make it a commodity product.
The barriers to entry to this business are very high
capital requirements, patents, complex mfg processes,
long lead times, the close tolerances and precision of
mfg, highly skilled labor to name a few. IMHO
commodity products are not characterized with such
attributes. It it were a commodity product, the US would
have been importing it from the SE Asian countries that
want to import it.
Now the ART or the touchy-feely part. People have gotten
burned pretty badly July 96 with small-caps and the
liquidity problems that comes with them. They just
started getting their feet wet this summer. Too bad
the market tanked and the big cap techs have taken a
pounding in the last few weeks. Intel, Compaq, Dell,
3Com, Ascend, Bay, Hewlett Packard, Applied Materials,
Sun, on and on. When the techs rebound, and they will,
but I don't know when, my FEELING is the money is
going to the big cap techs again. I hope I am wrong for
some of you sptr holders. You are simply getting good
large tech companies at good prices now, if you have a
2-3 year horizon. You usually do not get good companies at
cheap prices. At current price, if you have a 2-3 year horizon,
GLW looks worth putting on your radar screen as well. This
is not to say SPTR is overvalued or is a bad investment.
Just that IMHO I can find better alternatives for my hard
earned money in the form of larger cap techs.
If I see a catalyst in the 3Q 97-10Q, or in a press release that
I have some level of confidence in, of if folks start getting uneasy
of large-cap techs then I may even get back into SPTR. Missing
out on $3-4 dollars will not bother me. If SPTR is a good buy
today at 12* it will still be a good buy at 16* in the future.
Assuming the change has been caused by fundamentals
and not speculation. |
