Optimistic Forecast For Syntax-Brillian: The Rollercoaster Ride May Be Over

For the past couple of months I have been planning to go to Six Flags Great Adventure (SIX) theme park, but I could never convince myself into actually going. After all, I received the Six Flags treatment from Syntax-Brillian's (BRLC) stock, which has provided me with all the thrills, chills, and nausea of the Scream Machine.

The stock started an innocent pull back from a 52 week high of $11.70, but was priced at $8 after first quarter earnings report which did not beat analyst's expectations. Second quarter missed estimates as well, and the decline in value was compounded by a secondary stock offering. A month later the thrills came as a result of the stock appreciating over 300% in 6 months; the chills set in after BRLC lost over half its value year to date. During that time, there have been several events that have turned the optimistic buying of the stock into a pessimistic selling nightmare. BRLC bottomed out at around $4.50 after rumors indicated (incorrectly) that Circuit City (CC) was dropping the Olevia brand from its lineup.

But before you start avoiding this stock on all the negative news that has been surrounding it, there seems to be a light at the end of the tunnel for BRLC after all. One of the major problems management has been facing is cash flows. Their LCD revenue increased by over 230% in one year, which resulted in increased production. As a result of most of their growth coming from China, as of March 31, Syntax-Brillian's accounts receivables from their Asian distributor totaled $170 million. Of that amount, over $47 million was past due. And as of May 9, there was a reported $69 million past due in receivables. This starvation of cash in a high growth environment allowed management to justify a secondary stock offering. However, management also released a statement in their SEC filings saying that they believe that there is payment lag from their distributor, and that it is seasonal in nature. They added that they anticipate a full compliance with payment terms by June 30, 2007. If these payments come to fruition, it should help pump new life into their cash flows, into the confidence of investors, and consequently pump new life into the stock.

Syntax-Brillian's revenue generator has been their LCD TVs, but they engage in 2 other lines of business. A cousin to the LCD, their second line of business is their LCoS TV market. LCoS can be likened to a high quality rear-projection TV, similar to TVs based on the DLP technology. While the image quality is certainly impressive, and is better than LCDs, the market has been dead weight (a painful example of a company which only specializes in LCoS is SpatiaLight (HDTV.OB). The stock traded at $1.50 in January and is trading at $0.06 as of this writing). In the latest 3rd quarter, sales of LCoS went from over $1million to around $400,000, while costs associated with LCoS increased to over $4million. In other words, LCoS costs superceded sales by over 900%. The third line of business is their Vivitar digital camera products, which allotted $26million in sales and $24million in costs, and for the time being can be seen as having a slightly positive impact on earnings.

The impact of LCoS for future returns, though minimal, should be good for investors regardless of whether LCoS succeeds or fails. If BRLC does get more contracts for LCoS, then margins will increase. If LCoS is going to go down the same path as HDTV.OB, then Syntax-Brillian can drop that line and end up earning money by not spending money to keep that business afloat.

Most of the good news for BRLC, and for its investors, is with its core LCD TV market. While net sales in North America almost doubles from $120 million to $230million, their growth in Asia can be likened to the Shanghai Composite Index. Net sales from 9 months end in 2006 were $13million, and jumped to $250million in 2007, surpassing sales in the US and Europe combined. This opportunity abroad is slated to continue, especially with the advertising during the 2008 Olympics in China.

In the States, Olevia TVs are positioned in the value consumer market, selling TVs as much as half off comparable TVs from name brands like Samsung and Sony. The added value comes from the high quality performance of their TVs. Consumer Reports, which has over 4,000,000 subscribers, has given Olevia great reviews--notably giving the 42-inch Olevia 542i a 'Best Buy' rating for LCD TVs with screens 40 inches and larger. This makes Olevia a great buy for the money, and distinguishes them from other 'value' competitors like Vizio and Westinghouse.

There are other factors that make this stock look like it's coming around. Kolin's price protection rebates are no longer as significant as they were, having decreased from 47% of net LCD cost of sales in 2006, to only 10% in 2007. This should allay fear in investors that may be wary of Syntax-Brillian's ability to perform without those rebates. The past two quarters have been statistically slower in sales than the quarters during the holiday season. Because of that, forecasts will likely be raised for the coming quarters. Syntax-Brillian has also been actively increasing its presence in stores. On top of that, during this fiscal year, BRLC managed to reduce their costs by over 5%, as compared to 2006.

Arguably equally as important as reality, is investor sentiment-which has been known to stray from reality on more than one occasion. Over the past few weeks, options having been heavily weighted on Calls, and the Put options have been trending away from pessimistic numbers as well. And, of course, the stock itself has started to trend upwards, gaining almost 7% on Monday. BRLC has also been added to the Russel 3000 Index, which should strengthen the stock's performance.

The fiscal year for BRLC ends this month. Accordingly, I would advise investors to pay extra attention to the status of receivables. Amidst the pessimistic stock performance, there are a lot of positive things happening for Syntax-Brillian -- they just introduced a 65" 1080p LCD, and yesterday Olevia was named Official HDTV of ESPN Deportes, which is great news for their Brazilian Olevia-Senna joint venture. It looks like I may be going to Six Flags after all.

Disclosure: Author has a long position in BRLC

BRLC 1-yr chart

Comments

[mlkr:]

very good piece.. wonder if the author would get into TV's production issues and recent suppliers' credit squeeze as factor for gloomy 1st Q forecast..
thnx in advance

2007 Sep 15 06:56 PM