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

To: kolo55 who wrote (678)	4/22/1998 1:44:00 PM
From: Ron Bower	Read Replies (1) \| Respond to of 1418

Paul, Definitely apples to oranges- about the only thing that Deswell and Flextronics have in common is that they are in the similar businesses. One is a very large multi-national company while the other is just a small city startup. Both have been successful. If they ever compete, it's in the distant future. Deswell reminds me of a small city startup that I owned until last Fall- Methode Electronics. When I bought, they were a little OTC company with less than 100 employees in a small metal building. Look at them today- over 3,000 employees headed for $1B revs. I mention them because they were very much like Deswell without Deswell's advantages. I sold them because of companies like Deswell and Flextronics. I disagree with you on negative risk. Flextronics is operating at a very low margin. (COGS of 90%?) and very high overhead. With a strong world economy they will increase the margins and do very well, but a global economic downturn (Asian situation?) causing a drop in revs would likely result in losses. Deswell operates at high margin and very low overhead allowing them to generate profits at much lower revs and margins. If there is a world economic weakness, Flextronics reliance on the large companies is a disadvantage. A reduction in the major contracts would require them to seek other business at a time when their competition is also seeking. To maintain revs, they would be forced to got after business from smaller companies that their operations are not geared to serve. For Deswell, there would still be numerous small customer opportunities. This goes back to the earlier discussion on the costs for a customer. Deswell can develop a product for a lower initial cost, but they would have a higher unit cost. For small customer companies, the initial outlay is a much bigger factor than the unit costs, a big enough factor that they will stay with Deswell even if they need higher than anticipated units. With these small companies, Deswell can maintain the high margins. There are limits to Deswell's growth because of this type of operation, but I feel they can easily grow to $500M revs (5-7 years). Even with much lower margins, the net earnings could easily exceed $50M at that level (+/-$9.00 share). I have no idea what the price would be, but I'm sure it would be a lot higher than it is now. I sold the Methode at 41 times my cost basis after collecting years of dividends. (Employees were exercising their stock options and selling. They were right, price dropped from 26 to 15. Some are now buying it back. It isn't the Insiders you need to watch, but the low level employees.) But- Deswell could be acquired by a company like Flextronics. They both have facilities in Shenzhen. JMHO, Ron