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Technology Stocks : Deswell Industries (DSWL) -- Ignore unavailable to you. Want to Upgrade?

To: kolo55 who wrote (674)	4/20/1998 1:09:00 PM
From: Ron Bower	Read Replies (2) \| Respond to of 1418

Paul, I had become a little Bearish over the weekend and decided to run the numbers again. My numbers and your post put the Bull back in my thinking. I've been working on Deswell's potential revenue for fiscal '99.. I'm having trouble estimating the impact of increased assembly work, but the numbers I come up with indicate a minimum of $17M earnings on $85M revs, a little over $3.00 EPS for fiscal '99 allowing for a small increase in dilution. This is a very conservative estimate. It's based on the current operation impacted by the additional machines for Jetcrown and the resulting revenue increase for all three companies. Any other expansion and contracts would increase these numbers. I am still comfortable with $3.50. I became more bullish when you related Deswell to Flextronics in your post. These two companies are vastly different. Deswell is extremely conservative with growth controlled by generated cash reserves. Flextronics has been growing thru borrowings and acquisitions. FLEXF is selling at over 30x '98 projected PE, Deswell about 8x, yet they have very similar projected growth rates. The price difference is market cap and the number of analysts covering the company. With the analysts visiting Deswell this week, the situation may soon change. I feel Deswell's sales to small companies to be an advantage. As you state, Flextronics has major customers while Deswell is geared to the small companies. I feel this to be more conducive to growth. These small but growing companies like InterTel and Harmon can contract with Deswell, pay the set up costs, take delivery of an initial order that's only a small portion of the amount they hope to take, then reorder as they deplete inventory. If Deswell does this with a variety of customers, not only will they have growth, they'll have stable growth. They wouldn't be subject to the revenue variations inherent to dealing with large customers and a major economic downturn would have far less of an impact on Deswell. A absolute worst case scenario is Deswell having zero growth beyond '99. There's little doubt they would continue to be profitable. Even with no growth, the potential increase in BV and dividends make Deswell worth a $28.00 investment. If the likely growth rate is factored, one could easily make a case above $40. I really should be making bearish posts as I would like for Deswell to stay where it is for a while. JMHO, Ron