You are exactly right, DLJ doesn't have a clue. Some analyst lumps Inacom with all of the other distributors, and concludes the stock is a sell because of the margin pressures soon to be felt from Compaq's inventory build-up. To this arguement I submit the following counter:
1) Much of Inacom's inventory is price-protected. And even if margins fall, your talking in the neighborhood of .25 percentage points. Hardly a catastrophe.
2) DLJ does not understand that Inacom is much more than a distributor of computers. Consider the following facts:
*Computer products account for roughly 91% of Inacom's revenues but
only 36% of its profits! See below:
*Inacom's service revenues are only 6.5% of ICO's total revenues but account for 46% of its profits! And service revenue grew 80% last year alone.
*Even if you assume that service revenues slow to 40% growth, the bottom line for ICO will grow by 25% even if distribution profits record no profit growth!
*Soon made-to-order assembly will begin to slow the deterioration in gross profit margins for the distribution business.
*The company has steadily increased its profit mix from distribution to service business. By year 2000, 2/3's of Inacom's profits will be from service division.
*Management states in the annual report that top-line growth goal is 20% and bottom line eps growth goal is 25%
3) Management's credibility
*CEO Bill Fairfield has delivered on his promise to make Inacom much more than a distribution company. With 60% of the profit last quarter from services, this company has transformed itself.
*CFO David Guenther is an honest numbers cruncher who tells it like it is. No hoopla. And the numbers speak for themselves.
4) Companies fundamentals:
*At 12.5 time trailing earnings, company is grossly cheap.
*At 10.5 x projected earnings of $2.50, the company is absurdly undervalued.
*At 1.3x book, the company is a bargain.
5) Misunderstood
*Simply put, this company is under-followed and misunderstood. Inacom is lumped in with other hardware distributors, and valued at a steep discount to these others (IM, TECD). Yet its eps growth will be much less volatile. It should trade at a premium, not a discount.
6) Why so is Inacom so cheap?
The company needs more street exposure. But even more than this, the liquidity of the stock makes it difficult for institutions to buy and sell. With a large institutional ownership and a small float, the companies shares are extremely volatile, depending on whether an institution is a buyer or seller on any given day. How many 30,000 share one point down days have we seen? Plenty.
7) Solution for Inacom:
Inacom needs to split the stock 3 for 2. This would allow more liquidity and bigger instituions could acquire the stock. EPS numbers are already here; the company is already performing. Now it must make itself available to all potential institutional investors by increasing its float. When it does, the stock will fly. I will be flying to Omaha for shareholder's meeting to suggest this to the CEO. This company needs to pound the table, sell itself to the street, and split its stock. Remember, IM was a $15 stock when it came public, now over $37.
8) Fair Value:
*The stock is worth a minimum of 15x earnings (15x2.5=37.50)and probably closer to 20x earnings or $50. Two years from now you could see this stock at trading at 20x $3 earnings or at $60. This is not completely unreasonable at all.
I hope this helps everyone to analyze this company. It is worth much more than its current price. What an undervalued gem. For those who are waiting for the low 20's again, don't hold your breathe. I doubt you ever see those numbers again. Buy this stock NOW!!! It is far too cheap...Don't risk missing the move. One more quarter of meeting or beating street estimates will send this stock up. Mark my words. Compaq's problems will pass. |
