I have agreed with Mr. Pink's short position on CLST since Novemeber. I do not share his position on CELL. CLST's accounting practices and growth prospects for 1998 warrant market punishment. While casual observers may believe that CLST's failures indicate that the sector may be sick, knowledgeable investors know that the sector is very strong, Brightpoint is stronger because of it, and that CLST's downfall was self-induced by its management and accountants. In fact, many of CLST's losses in market share are now material gains for Brightpoint. Comparing CLST and CELL is like comparing black and white: they're both colors but do not look alike. CLST tanked from $22 to $4 a couple years ago for similar reasons. If you look at the 95-96 chart, you see that CELL continued to return positive shareholder value at that time. Why? Because CELL had nothing to do with CLST's downfall then, and CELL has nothing to do CLST's downfall now (other than capturing market share) . In retrospect, as long as CELL continues to deliver expected growth earnings, CELL shareholders will look back and see positive shareholder returns while CLST drifts lower.
Some casual observers based a decision to short CELL solely on the fact that it participates in the same sector as CLST or because of its Asia exposure without doing additional research. If you have researched, then you know that Brightpoint's exposure to troubled economies in Asia is actually less than 10%. The other 32% in Asia is with the China government, military and executives, all of whom would rather do without water before they did without celluar technology provided by Brightpoint, and China is still strong. Brightpoint has not caught the Asian Flu. Orders are strong, and orders have not been cancelled, as stated by the company and anlaysts following the company. Unlike its competitors, Brightpoint has a track record of honesty.
In addition, Brightpoint Europe, US and non-Asia sales are way above expectations and will provide revs to exceed EPS expectations and provide an insurance policy against any potential slowdown. Brightpoint UK's sales has benefited greatly by Europe's recent spending trend on technology. CLST is very weak in Europe and was unable to capitalize on this boom. Brightpoint has also known about cellular price wars for quite some time, which is why they became cool, and now provide higher margin value-added logistic services which in its it own right is a highly lucrative business. In the past 6 months, over 13 deals with a variety of large vendors spanning the globe have been secured for distribution AND higher margin SERVICES (including Ericson, Nokia, Nextel, Telstra, Samsung, Isla, Motorola, Iridium etc.) which comes close to a garantee of increased revenues and growth for 98 and says a lot about growth prospects for 99 as well. They are not locked into a single vendor as CLST is. The weakness of one of Brightpoint's vendor at a particular time will be offset by the strength of the other vendors. Again, they are providing higher margin logistics services to almost all vendors so the ongoing price wars has had significantly less impact on CELL than its competitors (CLST) whose primary revs come from wholesale distribution. Why do 12 analysts follow CELL, while ony 4 analysts follow CLST? When both companies dipped in October, people that I know work with both companies were shorting CLST and buying CELL. A casual observer might ask why CLST is sinking with a low PE and CELL is rising to its previous fair valuations. The answer is... Brightpoint has excellent trailing fundamentals, excellent current fundamentals (stick around for earnings when they beat the street), and soon-to-be-upwardly revised future fundamental expectations (more news of contracts coming). CELL also has one of the most agressive, honest, well-run management teams in the industry. They are highly diversified in terms of geographics, vendors and demogaphics so weaknesses in one area are easily offset by strengths in other areas and the management's and employee's ability focus on growing the bottom-line. CLST, on the other hand, has a low PE because the PE represents what the market expects from a company over the next year, and the market expects declining earnings and more accounting nightmares. Who wants to buy into decling earnings and shabby accounting practices? CLST is locked into Motorola distrbution and MOT told the market that revs are declining. Unlike CELL, CLST does not have much a leg to fall back on when one of its primary vendors is slowing down. Also, CLST has not been very upfront with the market re: its accounting practices. So then if a ship is sinking because it blew a hole in its own hull, do you expect all nearby ships to sink? NOT.
Bottom-line is that for Brightpoint, there is clear evidence of continued strong growth for the current quarter, 1998 and even 1999. Unless China's governement, military and executives fall out of bed, there is little evidence to suggest its growth shall change. CELL may trade sideways at times over 1998, but in the short and medium term, especially with expected good earnings for 4Q97, it looks like CELL deserves valuations consistent with its expected growth. With a mimimum expected growth rate of 44% for 98, I would be surprised if upcoming earnings suggest otherwise. Pooling of interests via acquisitions will also increase EPS in 98. Of course there are no garantees, but I doubt CELL will remain below $18 for very long at all. My target in the short-term for this stock is $23-$28. At my high target of $28, that gives CELL a growth PE of 41 which is short of 98 expectations of 44%, and a trailing PE of 56 which is short of 1997 earnings of 66%. And as long as Brightpoint continues doing what it has been doing and doesn't screw up (and it appears that nothing but growth is on the horizon), CELL should break 20 in the next few weeks and trade in the 20s and 30s for the majority of 98, with support at $20. That's my expectation of the company. I'll be satisfied if they exceed my expectations over the next few weeks.
Regards,
David G. |
