Globaltech (GAI) seems to me to be a great value opportunity.
The stock is currently trading at $19, I believe at a minimum it should be trading in the
low 30's. The company was taken public in an IPO about 3 weeks ago so is still
relatively undiscovered. Following is a brief description of the business and my tartget
price rationale:
Valuation:
Sales 3/31/97: $62.7mm; Sales 3/31/98: $116.7mm (86% growth); Analyst Estimate
Sales 3/31/99: $165.2mm (42% growth - I believe these numbers are too low).
Apparantly, analyst estimates from the IPO roadshow are $1.70 EPS CY 1998 and
$2.25 CY 1999, or growth of 33%. At $19/share, this company has an 11 P/E and is
growing at 33% using the analyst estimates for earnings this year (which I believe to be
very conservative as they are with many new public companies). Its PEG ratio is
therefore on 33%. Globaltech's best public comparable is
a company called Windmere Durable Holdings (WND). It trades at a P/E of 18x CY
1998 earnings at its current price of $25/share. Windmere is growing sales and earnings
in the 20%-25% range. Globaltech is growing significantly faster and has a better
business model with its original design capability (described below), so at a minimum
should get at least an equivalent P/E. At 18x P/E, Globaltech trades up to $31, 63%
appreciation from its current price. If it were to trade at a 25 P/E, a 25% discount to
what I believe to be its conservative analyst estimated growth rate of 33% in earnings,
Globaltech would trade up to $42.50, 123% appreciation from its current price.
Business Description:
Globaltech is an orignal design manufacturer (ODM) focused on the consumer products
industry (as opposed to the more traditional CEM's). What this means is that Globaltech
designs and builds finished products for an OEM as opposed to the typical contract
manufacturer which only builds (although there is tremendous engineering value-added
here too) product. Globaltech's product line is focused on the high-end of the consumer
segment and includes things like breadmaker's and foodsteamer's. All of Globaltech's
manufacturing is located in China, so they are very low cost, and in combination with
their orignal design capability and rapid manufacturing process, offer a huge value
proposition to OEM's (as indicated by their 25% gross margins vs. 10% for a typical
contract manufacturer).
Here is evidence of the value proposition: Sales 3/31/97: $62.7mm; Sales 3/31/98:
$116.7mm (86% growth); Analyst Estimate Sales 3/31/99: $165.2mm (42% growth - I
believe these numbers are too low). The reason Globaltech is growing so fast is
three-fold:
1) They are much lower cost than American and European OEMs. Unlike the typical
electronics OEMS, many consumer products OEMs still have very high cost captive
domestic manufacturing. Globaltech can do things at about half the cost of the typical
OEM
2) Rapid new product design and introduction capability. Many OEMs are ponderous,
and have long product design in introduction cycles. Because of this, they often fail to
capitalize of hot consumer trends because they can not get product to market quickly
enough.
3) The marketspace for what Globaltech does is huge.
Here is the bad news on the company, which is why I think the IPO has not traded up
significantly. Sunbeam will account for in the neighborhood of 35% of sales this year.
Although Sunbeam is somewhat of a concern, here are some important facts to
consider.
1) The comapny was taken public after the Sunbeam debacle, and management and the
underwriters were comfortable with the issue
2) Most of Sunbeam's problems have to do with gas grills, which is what they stuffed
the channel with to inflate their sales numbers. The products Gloabaltech makes for
them are things like breadmakers and foodsteamers, so not the things causing Sunbeam
grief.
3) Sunbeam has already gutted their organization internally both in terms of production
capability and new product design/and introduction capability so they will need to rely
on Globaltech to help them continue to grow their business
4) Nearly all of Globaltech's growth will come from customer's other than Sunbeam, so
Sunbeam should decrease as a percentage of sales over time. Other key Globaltech
customers include Black&Decker, Mr. Coffee, Moulinex, Krups, Procter-Silex,
Welbilt, Revlon, and Hamilton Beach.
Conclusion:
I believe that Globaltech has a truly unique capability and offers a strong value
proposition to a large marketspace. I think the IPO has not traded up significantly due
to all the overhang from Sunbeam (which is a legitimate concern), and has now fallen off
of people's radar screens, which has created a great buying opportunity. I believe the
Sunbeam issue is completely misunderstood by Wall Street for the reasons mentioned
above. Once Globaltech begins to report their numbers, and things turn out fine, people
will begin to take notice. The sock is trading at such a significant discount to its growth
rate that the value will be too compelling for people to ignore. If it turns out that anlaysts
estimates are too low (which I believe they are), and Globaltech starts beating earnings
estimates, this stock will be all over everybody's radar screen. A stock trading at an 11x
P/E growing at 40% should attract a lot of attention.
My opinion. |
