On the bull side:
1. What's been holding Zenith back is the slowness of the telecommunications, the entertainment and cable industries to bring digital to the home:
A. Few cable companies have upgraded their cable modems to digital since the standards have just been established by the industry. Zenith has a new cable-modem contract with 21st Century which covers the entire Chicago loop area and a huge cable-modem contract with Mexico's second largest cable company, Megacable and is now shipping to both companies. This whole area is heating up and should be a cash generator for Zenith in 1998 and beyond as the rest of the cable companies upgrade.
B. The STB sector could well be the hottest electronic sector during the next decade. As the satellite, cable, telco and broadcasting industries bring digital (HDTV, SDTV, Internet, PPV, VOD, Home Shopping, MOD, etc.) to the home, every home will need a STB to process and redirect the digital data to the appropriate device whether a HDTV, computer monitor, plasma screen, game player, etc.). Zenith, already has a $1 billion contract with the Americast group (BellSouth, GTE, Ameritech, Disney, SBC, etc), another large contract with NDS and a several hundred million dollar STB contract with the Latin America subsidiary of Rupert Murdoch's, News Corps. No competitor offers a more flexible and higher-tech STB than the Zenith branded STB which has as its partners: C-Cube, Microware and NDS. STB sales will be very profitable for Zenith in 1998 and the decade ahead.
2. Analog TV sales are expected to remain in the 20 to 25 million per year number in the US alone in 1998. Zenith has slimmed its model lines and will feature higher quality audio and more attractive design features in 1998. Zenith is # 2 in US TV sales and, according to RCA (#1), Message 3029012 the market is firming. price wise, with many categories facing product shortages. Zenith has cleaned up its distribution problems and is turning out high-quality analog TVs. Their 32" Inteq set beat out every foreign competitor in a recent major CE award.
3. Digital TVs (HDTV, SDTV and converters) will be the real kicker. Rather than spec on the outcome now, better to wait until the International CES in Vegas beginning Thursday to get a better read on the situation. Over 300 of the world's media and print press will be covering the show with live feeds to every major network and CNBC. HDTV, certainly, will be the hottest topic at the show and Zenith is centered smack in the middle of this BIG story. Remember,
4. Royalties. Zenith will earn a licensing fee on every HDTV, SDTV, converter box and PC capable of receiving and displaying its patented VSBi-scanned transmissions.
5. Cross manufacturing, cross marketing and cross distribution are hallmarks of the Zenith/LGE partnership. Together, Zenith and LGE are able to penetrate and attack any CE market sector in the Western Hemisphere toad, and the world tomorrow. Examples: LGE will manufacture Divx players and Zenith will market/distribute them in the US under the Zenith brand while Zenith will manufacture STBs and LGE will market/distribute them in Mexico and Canada.
6. Zenith has manageable debt ($25 million in short term and $161 million in long term, from latest 10-Q) and continues to seek to enhance its liquidity in this transitional period. LGE has guaranteed recent Zenith credit agreements and there is no indication that LGE will not guarantee future credit agreements that may be needed by Zenith. The company's market capitalization is only around $400 million with shareholder's equity of about $65 million.
On the bear side:
1. Zenith needs to quickly replace its CEO, Pete Willmott, who only agreed to become CEO for a limited time and now wants to retire.
2. No one on the board, other than Willmott, owns substantial shares of ZE. A new invigorated and independent board is required.
3. No Wall Street analyst has covered Zenith in many years. Most funds are unlikely to invest in Zenith without the cover of an analyst's opinion.
4. The Korean situation remains murky although it appears that LGE is the best of the Korean corporate lot in terms of cash, focus and profitability.
5. Liquidity problems appear to prevail. Zenith has many options, however, such as third party equity investments, preferred stock issuance, additional credit agreements with LGE guarantees, etc..
Certainly, both the Zenith bulls and bears have valid points to offer. Agree with Scott, however, that it's the bears who have been in charge all during 1997...and with good reason...Zenith continues to bleed red and has not yet turned the corner. The question is...will the bleeding stop soon and will Zenith emerge into sustainable profitability in 1998 and the decade ahead?
The International CES starting on Thursday in Las Vegas will provide us with many more insights on whether Zenith will turn the corner soon. Can't wait..... |
