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Technology Stocks : Creative Labs (CREAF) -- Ignore unavailable to you. Want to Upgrade?

To: Brian Lempel who wrote (7631)	1/2/1998 12:20:00 AM
From: grogger	Respond to of 13925

I have an ML acct too and saw that it is on the list. Any word on how the holidays treated CREAF? If it was good then we should benefit real soon. Do you know when earnings are expected to come out and what estimates are? I'm looking for them to beat estimates again especially since they were lowered recently. Good luck, Rob

To: Brian Lempel who wrote (7631)	1/2/1998 12:59:00 AM
From: Dennis G.	Respond to of 13925

Yes indeed. CREAF is ML's top pick for Asia-Pacific. Rating is the same at above average risk (C), short term buy (1) and long term accumulate (2). Here's their latest report: 12/10/97 12 Month Price Objective: $30 Estimates (Jun) 1997A 1998E 1999E Net Income (mn): 167.0 237.1 247.4 EPS: 1.84 2.50 2.59 P/E: 12.0x 8.8x 8.5x EPS Change (YoY): 35.9% 3.6% Consensus EPS: 2.51 2.77 (IBES: Dec 97) Cash Flow/Share: 3.24 3.18 3.44 Price/Cash Flow: 6.8x 6.9x 6.4x Gross Dividend: Nil Nil Nil Gross Yield: Nil Nil Nil Opinion & Financial Data Investment Opinion: C-1-2-9 Mkt. Value / Shares Outstanding (mn): $2,090 / 95 Book Value/Share (Sep-97): $6.54 Price/Book Ratio: 3.4x ROE 1998E Average: 40.8% Net Debt/Net Equity: nm Est. 5 Year EPS Growth: 15.0% 1998E P/E Rel. to Home Mkt: 0.7x Investment Highlights: Acquisition of Ensoniq broadens Creative's footprint over professional music & PC audio Market share gains from acquisitions should be clearly evident by mid-98 Management expressed confidence in meeting earnings estimates for the Dec qtr and FY98 Fundamental Highlights: Ensoniq sales were US$44m for the 9mths to Oct. At US$77m, the acquisition price is under 1.3x sales. In return, Ensoniq opens up a new OEM channel for audio chipsets with established customers like Hewlett Packard, Gateway, Micron, Apple etc. With the acquisition of Netmedia (Opti), Cambridge Soundworks (HIFI) and Ensoniq, Creative has spent US$130m on a group with combined revenue of over US$120m. Combined profits currently are minimal relative to Creative's core profit base. We expect over US$50m in-process R&D write-off in FY98 Netmedia (Opti) opens up notebook audio chipset market, HIFI opens up speakers and Ensoniq, OEM PCI-audio chipset. Who is Ensoniq? Founded in 1982, it is a major player in professional music equipment (like E-mu) but with a more mass-market bias (E-mu is mainly high-end) Their products include musical instruments, digital recording systems, PC-audio cards and chipsets. Ensoniq Value-Added #1 - PCI chips Creative has acknowledged that Ensoniq has one of the best PCI-audio chipset solutions in the market with numerous design wins and already shipping in significant volume. Ensoniq also has widespread experience in selling baseline audio chipset solutions to OEM customers. Relative to them, Creative's own PCI-audio chipset solution, launched a year ago, met with only limited success. (If you can't beat them, buy them!) This is the wedge, with which Creative will expand it's presence in the baseline audio chipset market. Using Ensoniq as a lower-priced brand, the SoundBlaster premium need not be eroded. Since PC shipments are around 80m per year, Creative's audio card volume of under 20m per year leaves a huge chipset market that is currently dominated by other players eg. ESS, Opti, Ensoniq, Crystal. If Creative can dominate the chipset market the way they do the card market, it could add a couple of hundred million dollars to turnover. On that scale, margins would be quite satisfactory despite the lower pricing. Ensoniq Value-Added #2 - "Sega" Ensoniq dominates the keyboard sampler business and combined with E-mu, Creative could have 80% market share. Ensoniq also offers music authoring software which is superior to anything E-mu currently has. Professional music/audio is to Creative what amusement arcades are to Sega. Just as Sega tests the envelopes of its new gaming software and technology in the arcades long before scaling them down for the home, Creative does the same with professional music and PC audio. Although E-mu already provides the high-end input, Ensoniq brings greater breadth to Creative's professional music know-how. More than E-mu, Ensoniq also has extensive experience in scaling professional audio technology down to the mass-volume PC market. When will acquisitions bear fruit? Notwithstanding macroeconomic challenges, the combination of an enlarged pipeline of products for Creative and a grossly expanded channel for the acquirees should yield very visible financial results as CY98 progresses. Early successes are already visible with the US$99 PC Works speakers from Cambridge Soundworks which are now widely sold in Creative's retail real estate. After spending all that money, there is still US$330m, excluding further cash flow from the Dec quarter. We expect more pieces of the multimedia jigsaw to fall in place next year! Dennis