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Technology Stocks : DII Group, Inc. -- Ignore unavailable to you. Want to Upgrade?

To: jeffbas who wrote (1744)	10/20/1998 1:56:00 AM
From: kolo55	Read Replies (1) \| Respond to of 1845

OK... Good Qs. Lets see some ideas. Do you believe one times sales (plus an earnout?) for a China operation is a "fire sale" price? I was wondering if they overpaid. (I think of DSWLF.) For an assembly operations, one times revenues for a small regional Chinese player would be too much. Assemblers like this would probably sell for one half of revenues. Deswell gets about half its revenues from the Kwanasia assembly operation. Yet the stock market, even at the current low valuation levels, values DSWLF at about 70-80% of revenues. The board manufacturing business that Multek bought in China gets over 20% gross margins, probably double assembly margins. Thus we would expect this business to sell almost twice the price of assembly business. This is one of the hidden values of DIIG; Multek gets 25% gross margins overall, in a year the board business craters. In a normal year, Multek gets over 30% gross margin. This business is a cash cow gem, even if it isn't growing as fast. So yes, one times revenues for a growing bare board manufacturer in an enormous growth market, could be a very good price. This operation is doing about $40M , and would do $65M at earn-out. So operating earnings with 20% gross margins will be about $8M to $13M a year. On an all cash purchase deal valued at $40M, the return would be somewhere between 20-30% this year. And of course, the revenues from this operation should likely climb in future years. Finally, I like the idea of buying in the trough of the cycle. Strategically, DII probably considers this an opportunity to get into a growth market. On Orbit, I see some of these second rate semi operations losing their shirts -- mightn't it be contributing significant losses? It certainly has been contributing significant losses. But I'm assuming the worst is behind them here. They've written down a lot of the business, and have gotten past the start-up costs of the purchased fab. I don't see it dragging down the earnings as badly going forward. Every time a stock trades at an extremely low valuation, there usually is something wrong. For DIIG, its Orbit, and the over-reliance on one HP program at Dovatron. I just think in the SepQ, almost everything that could go wrong on these fronts, went wrong. Therefore, the future is looking up. Tangible book is only about $4, and debt to equity is quite high. We've argued over this before. If the company is growing and taking on debt to expand the business and break into the big leagues, then I'll take the debt laden company versus the regional small player who sits and pretends to be conservative and lets the sector pass them by. This is similar to when I preferred debt laden Flextronics in early 97 to ACTM... remember those discussions? My analysis of the sector shows that in the year an assembler breaks $1B in revenues, and in the following two years, the stock of that company seems to go up over 50% annually. Breaking this barrier seems to open a lot of new business opportunities leading to rapid revenue and earnings growth. Look at Solectron, SCI, Jabil, and Flextronics stocks when they broke the $1B mark. Well, DIIG's Dovatron is in a position to break $1B next year, if they get the Bay deal, or land another similar OEM outsourcing deal. Finally, I am not optimistic about the HP product, speaking as a consumer -- a multifunction product seems not to do as well on any one function as a standalone product. I don't like the reliance on one product. But that reliance is lessening, and this product still has probably at least 18 months of life left in it. But it served its purpose as getting Dovatron to focus on these larger deals. Incdentally, I understand this deal was landed because Multek did the prototypes, and then Dovatron picked up the business. Since Multek gets to see a large number of prototypes, this could be a good source for new program opportunities. Not one insider has thought the stock worth buying. True, I guess. But the company is buying back shares, and I believe they still are planning to buy an additional million shares back. So far this has hurt due to the falling stock. But if we get a recovery in the stock price, these buybacks will look pretty smart. At current prices I gather you like it a lot more than ACTM? ACTM will do about one third to one fourth DIIG's revenues next year, doesn't have a jewel like Multek with its high margins and the downturn resistance Multek demonstrated this year, and has possibly some substantial legal difficulties due to "cooked books". This puts ACTM into an entirely different risk classification. It took me a lot to reconcile selecting DIIG for some new investment, and I didn't do it until Jabil and Flextronics broke above 40, preferring to put my money in those stocks while they were in the 30s. I would have put money in SANM if it was still in the 20s, but its now in the 30s. I will probably miss a great rebound in ACTM, but I'll have less worries about return of my capital. I don't regret selling what ACTM I had at 10-11, as you probably don't regret selling at 12 or so. Paul