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Technology Stocks : CLST - CellStar Corporation -- Ignore unavailable to you. Want to Upgrade?

To: Mr. Pink who wrote (116)	11/28/1997 9:53:00 AM
From: Phil Forbes	Read Replies (1) \| Respond to of 641

Thanks for the insight. I appreciate it.

To: Mr. Pink who wrote (116)	11/30/1997 8:25:00 PM
From: Jeff Tribble	Read Replies (3) \| Respond to of 641

Congrats on the lucky CLST short in a thin market where it was easy to move the stock lower due to the report issued questioning their accounting practices and rumors that they are going to miss 4th qtr earnings by a wide margin. Now let me set the record straight on all of your faulty assumptions that when proven incorrect will cause CLST to move right back up into the 40's. 1) bloating inventories - CLST ended the 3rd qtr with 43 days of inventory on hand, while this is up 10 days from the 2nd qtr it is still lower than the 45 days they carried at the end of the 3rd qtr in 1996. This bump in days supply on hand at the end of the 3rd qtr is a seasonal factor of the 4th qtr being the highest volume qtr of the year, inventory is built heading into the qtr to meet higher demand for the 4th qtr. Inventory will be back down to the 35 day range at the end of Q4. 2) rising receivables - days sales outstanding of 35 days at the end of Q3 '97 are down from 52 days in Q3 '96 and only 2 days higher than the alltime low of 33 set in Q2 '97. This is far from a problem as 35 days is excellent for a distributor. 3) reserves dropping while reveivables go up - while it is true CLST's allowance for doubtful accounts dropped to $27mil in Q3 '97 from $33mil in Q2 '97, the decrease in the reserve DID NOT result from a reversal which created income allowing them to make their Q3 '97 earnings as the report questioning their accounting and the main fuel of the rumors driving the stock lower the past week suggest. CLST recorded a $1.5mil expense for doubtful accounts AGAINST income and wrote off $7.5mil in bad debts that were previously fully reserved. CLST ended the qtr with 13.5% of their receivables reserved which is more than adequate for a company that only has 35 days sales outstanding. 4) significant exposure to latin america and asia - CLST services latin america out of their Miami warehouse and sells the product in US$. 75% of CLST's asian revenues come from Hong Kong/China and are also sold in US$. This being the case, there is little currency risk in CLST revenues leaving the risk of declining demand. While there may be some decline in latin american demand, latin america makes up such a small portion of total revenues any decline would be immaterial. As for Hong Kong/China a drop in demand would be more material, however China represents the majority of their sales in this region and all reports to date show that China has been totally unaffected by the southeast asian problems. A report last week showed that China PC purchases were up over 50% from a year ago in the 3rd qtr and all reports I get are that CLST revenues from the region are proceeding ahead of plan. 5) overpriced - industry average PE is 18 times forward earnings. 18 X $2.50 (conservative 1998 CLST estimate) is $45. No problem here. 6) Insider selling - Al Goldfield sold approx. 2.5mil shares this summer representing less than 20% of his holdings. He had never previously sold any shares and still owns over 33% of the company. Again, a non-factor. The guys entire net worth is tied up in this company, any prudent individual would diversify when their net worth gets above $500mil. 7) sleazy management with a history of insider dealing - no need to respond to this statement obviously thrown out there to add fuel to the short fire. 8) negative cash flow - CLST had positive cash flow at the end of Q2, the only reason operating cash flow went negative at the end of Q3 is due to their inventory ramp for Q4. Every growth company with have short-term periods of negative cash flows when growth accelerates and positive cash flows when growth slows, that's a standard business cycle. A 1st year finance student knows this. 9) deteriorating industry fundamentals leading to falling gross margins - CLST's lower gross margins have NOTHING to do with industry fundamentals. They made a business decision to exit the retail business which carry higher selling, general & administrative costs along with higher inventory and accounts receivable risks. Operating income % has moved higher while gross margins have trended lower. This was a great business decision by CLST, not anything to do with deteriorating industry fundamentals. The Pacbell fullfillment agreement is a perfect example, this contract has added $130mil of revenues to CLST the past 2 qtrs with ZERO accounts receivable and inventory risks, so the incremental revenues at lower gross margins is justified. Once again congrats on the lucky short, but after plenty of due diligence over the past 2 weeks my 40,000 shares of CLST bought this spring stay long and more will be added this week. JWT