Outlook for the stock for 1999.
OK, based on info in the last post, the low ball forecast for DII is about $790M from Dovatron, about $320M from Multek, and about $65M from the rest. This totals about $1175M versus about $975M this year. This is about 20% top line growth. And given expected margins, should result in earnings of about $2.30 per share. The company's guidance to use $1.90 seems excessively low.
If Multek comes in at $360M, and they land the Nortel(Bay) contract, then we could see $1375M, a very nice 43% top line growth. And even with lower margins due to the lower margin box-build contract, we should easily see earnings top $2.60 per share.
I believe the stock is trading as though DII lost the Nortel contract. And at $10, the stock is trading as though it will lose some existing business and see earnings decline next year. In my view though, the company has fewer business risks than at the start of this year. In the DecQ of 97, the HP program was about 30% of Dovatron's business, next year this HP program should be about 15%. In the longer term (after next year), I have questions about the long term viability of this contract, especially with HP's laserjet printer business going to Jabil, and the inkjet printers to SCI, Solectron, and Flextronics. Perhaps this is one of the factors weighing on the stock. But in any case, the risk is lower than earlier this year. In the SepQ about to be reported on October 22, the HP program should bottom at only about $15M, and actually rebound a bit to $25-30M per Q moving forward.
Orbit won't really contribute to the company's performance, but its drag will be less. And Multek's expansions seem to be timed perfectly in a countercyclical manner. The company's earnings guidance seems to be very low .
I think management is weak at developing and executing a long term strategic plan. They seem to be very opportunistic at taking advantage of what falls into their laps. But they made a major mistake putting so much resource into Orbit. They should have used that resource to build Dovatron up to be a billion dollar player in the assembly business. I look at them, and am reminded of the line used by Marlon Brando in the movie "On the Waterfront". He played a hired thug who was an ex-boxer, and who threw a fight that would have given him a chance to compete for the title. At a crucial point in the movie, Brando turned to his brother (who also worked for the crook) and said "I coulda been a contender. You shoulda looked out for me, Charlie."
This what Dovatron should be saying to their management. "They could a been a contender." Its ridiculous that they are having to fight so hard to keep the $200M Nortel/Bay program. How can they compete for the $250 to $800M size programs that are now being let by OEMs? They can't … they aren't big enough. They had a chance to join the big boys SLR, SCI, CLS, JBL, FLEXF. So far they have blown it. They needed to make a sizable acquisition/expansion to get in the billion dollar club quicker.
But they still have a chance, which most of the smaller players don't. It sounds from the recent release that they are at the table for some of the deals coming. If they are able to land one of the deals, or make an acquisition, then they still have a chance to join the bigger players.
Given this, and the current price trading at 4-5 times next year's likely earnings, this stock looks extremely cheap. Even if a lot of things don't go quite as planned, the stock would still be attractive here. I sold out late last year, and replaced my stock with Mar25 calls which expired worthless, and have been out of the stock since. I will rebuild my position now, and started by buying some stock today.
The earnings release on Thursday (before the open) won't be great, but essentially all the bad news is out. The forward looking guidance should be good.
Paul
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