Management of Syntax-Brillian (BRLC) likes to keep investors "hot on the stock" by discussing top line revenues without paying attention to profits. Well, heck, anyone can sell $10 bills for $9. Yet, as LCD prices are rapidly becoming commoditized, investors must pay attention to 3 new problems facing Syntax Brillian.
1. LCD prices to drop 30-40% in 2007 . This means that the company can no longer write up inventory to help out cash flow, as they did last quarter and next year's margins will be greatly affected.
2. The LCD world was shaken upside down this week as Price Fixing Scandals might change the way LCD makers do business. It is the opinion of Stocklemon that this will mean more disclosure in the LCD markets. Investors are supposed to believe that in the coming years Syntax is to receive price protection from LG Phillips (NYSE:LPL). This would seem to be the only way the company could guarantee gross margins.
3. Look closely. Notice Syntax put out news the other day about a deal with LG Philips. What is the one thing that is missing from that press release? Any kind of guarantee of gross margin or price protection.
Another Concern For Shareholders
BRLC filed a revised S-3 last month, filing to sell over 8.6 million shares. The selling shareholders are Kolin, Great Step Company [owner of Vivitar] and BRLC's underwriter, investment banker and chief cheerleader Brean Murray. Stocklemon always finds humor when an analyst who cheer leads a stock also has close to 400,000 shares for sale in a registration.
The looming problems for the company are evident in the recent rampant insider selling that is now up to 2.5 million shares for the past 6 months alone.
Stocklemon observes that the company has an outstanding bank note which bore an October due date - recently extended to January -- that they seem under-capitalized to make good on. No doubt the company will need to and will raise more money. This will be good for the underwriter, but what will the impact be for shareholders? With drastically shrinking margins in the LCD business and prices that are falling at a rapid pace, investors should take a high definition look at this company.
Disclosure: Author is short BRLC.
BRLC 1-yr chart