Syntax-Brillian: Significant Downside Left

More and more bad news regarding Syntax-Brillian (BRLC) seems to come out every day. Not only is a credit crunch in Asia hurting Syntax's suppliers, it is also hurting consumer spending in the US which means consumers will cut back spending on more expensive items like high definition flat panel televisions. Combined with a supply crunch for 32" and 37" LCD panels and you have a recipe for disaster.

The large Tier-1 manufacturers which produce their own LCD panels such as Sony (SNE), Samsung , LG or even other Tier-1s with large buying power shouldn't have much trouble obtaining panels but for smaller Tier 2s and Tier 3s like Syntax-Brillian it might prove to be a more difficult task.

All these issues are added on top of the numerous accounting errors made by the company, weak internal control stated by their auditors, cash flow problems, and the fact the CFO is leaving soon for a private start-up company.

What's troubling is that the company just conducted a secondary offering at the end of May for $120 million and cash as of June 30 was only $28 million. It appears most of the cash went to Kolin, their contract manufacturer, in the form of deposits but yet the credit crunch is still hampering their ability to generate enough TVs for Syntax-Brillian to produce revenues of $170 to $180 million.

What is even more troubling is that if the credit crunch in Asia is to blame, as the company states, then why is the company forecasting sales of almost $500 million for Q2 if suppliers restrictions could only produce $170 to $180 million in revenue for Q1?

The company's optimism might be setting themselves up for a miss or further reduction of guidance. Equally troubling is that Merril Lynch, which conducted the secondary for Syntax-Brillian in May, is now rating the stock as sell with a comment that they have trouble independently corroborating the strong demand for Sytax-Brillian's Olevia televisions as claimed by the company. Could it be that demand for Olevias are actually decreasing and is part of the reason for lower sales projected for Q1?

Syntax-Brillian appears more and more to be just a speculative high definition play that captured many clueless investors, just like one of its competitors, Spatialight Inc. which produces LCOS technology and televisions just like Syntax-Brillian. Spatialight use to trade with the ticker symbol HDTV and at a high of $4. The HDTV ticker symbol was pretty much a dead giveaway it was trying to lure investors in by appearing to be part of the HDTV growth when in reality the company was an insignificant part of it. Spatialight now trades with the ticker symbol SPLT.OB over the counter at around 11 cents. Of course that is after a 50 to 1 reverse split the company conducted a few months after being delisted fro Nasdaq and trading for pennies over the counter. So in reality the stock fell from a high of $20 to 11 cents and investors that bought at $3-$4 lost over 96% on the stock.

Syntax-Brillian investors fare a little better right now;, the stock is "only" off its 52 week high by around 70%. However, given the uncertain future regarding the company and the fact that growth may be done for the company, significant downside still exists for the stock.

Disclosure: Author has a short position in BRLC

Comments

[mlkr:]

it is a comprehensive piece yet one-sided take..Longs do have another story to tell.
credit issue for suppliers will be overcome..
Consumer demand for LCD during holiday season will be up too..
18 million shares are shorted and any spike caused by short squeeze would kill mr paz's position
Mr paz should have disclosed details of his short position..

2007 Sep 19 01:32 PM

[London:]

I look at the out-of-stock at most retailers and find that Olevia TV's are in demand. May be that Merril Lynch did a poor research job on Olevia sales figures. I have no problem finding retailers asking for more Olevia TV's for their stock. In addition, Olevia TV's have the highest consumer rating at the low price.

It is like comparing apples to oranges when comparing Spatialight to Syntax-Brillian. There is no product or financial figure look alikes when examining each company.

2007 Sep 20 06:45 AM