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Technology Stocks : Gateway (GTW) -- Ignore unavailable to you. Want to Upgrade?

To: Dale Baker who wrote (7807)	7/20/2001 1:12:12 PM
From: A.L. Reagan	Read Replies (2) \| Respond to of 8002

Dale, I have no downside target for GTW and am using trailing stops here. I see the following continuing fundamental negatives: 1. The lower-end segment of the market will continue to be punished by low margins, primarily generated from DELL which has been successful in moving into higher margin lines and can subsidize this nasty price war for some time. 2. No surprise to anyone, but the desktop PC industry is never likely to return to once heady growth rates. It's kinda become like the TV set market. 3. If you read the press release, Ted Waitt is talking about yet another realignment of the business model, into some vaguely defined low-end "solutions" business -- sounds like manufacturer as VAR. But anytime an outfit lurches every few months from one business plan to another it's a major red flag of big trouble. 4. While they are busy playing the WS reported earnings game where every hiccup is a "special charge", the actual costs will drain cash. 5. The retail store network is a huge cash-sucker, they are tied into long-term leases, so this quarter's "strategic repositioning" strikes me as an "oh shit, we'll never cover the overhead, the subprime lending business was a failure, what the Sam Hill can we do to generate more margin out of the retail outlets?" A one brand PC store can never, ever, compete with the likes of a Best Buy, and I don't care how many peripherals and accessories the carry. Won't work. The only purpose IMO for single-brand consumer technology stores to exist is as an advertising and promotional showcase for products in urban areas with heavy foot traffic. Sony comes to mind. Those type stores don't make money, but they generate buzz and awareness. GTW type stores which are 8,000-12,000 s.f. in "B" strip shopping centers don't have a prayer against the Best Buy down the street. It is a strategy that has failed time and time again in the history of the PC industry (usually culminating in bankruptcy) and it has failed and will continue to fail for GTW. Not implying it will end up in GTW BK, because GTW has other legs to its revenue stool, but the lease commitments will be an ongoing drag on cash. These are just a few reasons. GTW is not a technology company, it is an execution company in what is largely a commodity business. On a normalized "good case" basis such an enterprise should net around 2-4% of gross sales on the after-tax bottom line, this implies annualized net of say $180MM if revenues are flat, that's somewhere around $.56 eps, give it a 15x multiple (assuming flat growth) = $8.00-$9.00 share price. 20x multiple, which I think is a stretch for this kind of company, and we're about where we are today. Book value per share is $5.73, which includes some as yet to be determined probable further write-down in the "other assets" category.