Brightpoint CELL-From Smart Money
We decided to focus our attention, however, on Brightpoint (CELL), whose stock has had a hard time breaking out of a price gutter, despite what looks like quite good prospects for growth over the next few years. SmartMoney picked Brightpoint as one of its "Ten Stocks Under $25" in May, and the stock is down a few points since then. But this $795 million marketer of cell phones makes our screen because we still believe this stock has potential. And these days, it is cheap: Brightpoint's price-to-earnings growth (PEG) ratio of .64 falls below the mean for the group in our screen, based on a forward three- to five-year earnings growth rate estimated at roughly 32% and a P/E based on this year's projected earnings of roughly 20.
Brightpoint is a distributor for the wireless industry, taking care of buying, packaging, shipping and warehousing cell phones from all the leading handset vendors, including Nokia, Ericsson, Motorola and Siemens. Brightpoint resells handsets to the network operators. In its most recent annual filing, the company said handset sales account for 88% of total sales, with the balance mostly made up of sales of accessories.
Though the stock has appreciated well over the past five years, trading has been especially volatile in the past 52 weeks. Shares have been pressed down generally amid concerns over handset demand in the wake of the Asia/Pacific debacle. But the actual trading history of CELL is like a good-news, bad-news story. At about 15 1/2 on Wednesday, Brightpoint is still in that wait and see range, as investors evaluate Asia and await the company's July 21 earnings announcement.
Analysts, who expect roughly $1.5 billion to $1.6 billion in sales this year, are generally ebullient about the aggressive product development track the company is taking. In addition to its core distribution business, Brightpoint is expanding into a new line of business with so-called "value-added services," as the company tries to develop a service business for manufacturers and carriers on a number of fronts. The various lines of business include purchasing handsets from manufacturers and managing inventory, as well as packaging phones in kits to be sold to consumers.
Customers who walk out of a wireless phone store, such as Omnipoint's boutiques in New York City and elsewhere, may have their phones preprogrammed for the desired wireless services by Brightpoint. Other services include insurance claims processing, repairing and refurbishing used handsets, stocking accessories for phones, and design of prepaid calling programs for consumers.
Analysts say the value-added services make up only a small portion of revenue right now -- about $21 million out of the $343 million in the first quarter of this year, or 6%. But because these value-added services are higher margin, they comprise a larger share of operating profit and therefore offer the potential for increased earnings going forward.
But nobody's going to buy Brightpoint for that business. Its real ace in the hole involves its exclusive deals with handset manufacturers. This year, the company became the sole distributor of Nokia handsets in the U.S., and the same for Ericsson. The company is also the sole distributor of Samsung handsets in the U.S. and in Canada. As the market for handsets expands with sales of digital PCS, most market watchers believe the rush to build out wireless networks with paging and email capabilities and other newfangled services will put more pressure than ever on branding and the control of distribution channels.
Brightpoint's exclusive deals do make it heavily dependent on smooth performance by each manufacturer. Fortunately, the company's customer base is more diversified. Of the 10,000 or so customers for the company's distribution and enhanced services, Brightpoint claims the top five account for no more than 15% of the company's business.
And there's the prospect Brightpoint may have a much larger customer base in future: The company recently signed a deal to distribute handsets for the global satellite phone service Irridium (IRDF), which is set to launch commercially soon. The company is also enjoying a boost from sales of Nextel Communications' (NXTL) wireless service, say analysts.
Brightpoint's two areas of concern are the health of the cell phone manufacturers and the health of the Asia/Pacific region, which analysts say accounts for roughly 38% of sales. Analyst Brad Williams with Legg Mason says Nokia looks to have a very strong quarter when it turns in results on July 24, thanks to sales of a new digital handset, the 6100. Ericsson, he says, is further along in its product cycle.
Ultimately, Williams thinks Brightpoint's distribution business can bring in fairly smooth earnings because the company will sell phones in each quarter regardless of which manufacturer is stronger. "Look at Nokia's results in the December quarter of last year; Nokia was down," says Williams. "But Brightpoint's revenues for the quarter were up 76% because Ericsson was going strong that quarter."
Of course the health of Nokia and Ericsson's unit shipments of phones are tied to the general health of Asia. While emphasizing the potential upside, and Brightpoint's positive history of pleasing the Street, analysts say the company won't really break out of its trading range unless there is some clear sign on the 21st and after that Asia won't negatively affect handset unit sales. That said, in the long run, there is little that can stop the explosive growth of wireless communications. And Brightpoint is still in the thick of i |
