Syntax-Brillian: Destroying Shareholder Confidence and Value

While there have been many stocks that severely disappointed investors this year, one that might stand out would be Syntax-Brillian (BRLC). In just a very short period, the company demonstrated how to destroy shareholder confidence and the value of its stock even though the company itself is profitable, trading at a low P/E ratio, and still expects further growth ahead.

It was just less then six months ago that Daniel M. Gelbtuch, an analyst for World Markets, stated that BRLC is much undervalued and could be one of the biggest short squeezes of the year. Of course, his lofty $15 price target he set back when the stock was trading around $7 never came into fruition. Instead, the stock was rather one of the best short candidates for the year next to sub prime lenders as it is currently down almost 50% from its January 3rd, 2007 closing price of $8.77. Gelbtuch was not alone in his bullishness or foolishness as some might see it. Many other analysts shared the same positive sentiment about BRLC as he did. Canaccord Adams, Robert W. Baird, and Cantor Fitzgerald, all had price targets over $10 for BRLC like Gelbtuch.

Some investors might blame the analysts and their over lofty expectations. However, many analysts are rated on how much trading interest and volume they create for a stock rather then their accuracy. If they tell investors a stock is fairly valued and don't expect it to move much, that's not going to generate much buying interest. If you say a stock is overvalued then those that do not own it will not buy it. However, if you tell them that they expect a stock to more then double then that is a different story. It doesn't matter if an analysts is wrong and the stock heads south, investors will just start selling which creates volume. Analysts can always blame the company if the stock price goes the opposite direction of their predictions and downgrade it rather then admit they were wrong.

Usually investors have no one blame but themselves for picking a losing stock but if they blame the company's management in this case, they might have some merit. Saying the company made some mistakes in just the past year would probably be an understatement. The company did make some slight mistakes earlier in the year such as forgetting to recognize a $2.7 million tax expense for Q'2 of 07 or violating an ATSC tuner mandate and being imposed with a $2.9 million fine from the FCC. However, you can say one of the worst was announcing a secondary offering, on the same day they released earnings for Q'3 of 07 on May 14 that missed analyst's expectations by a wide margin. There is nothing like missing analyst's earnings estimates by 25% and declaring that the company will conduct a secondary offering that will increase shares outstanding by 35% million at the same time to drive a company's share price down. If the company had decided to conduct a secondary earlier in the year when the stock was trading much higher, they wouldn't have had to dilute share holders as much. They also wouldn't need to turn down many of orders for that quarter because of cash limitations as the CEO at the time and current chairman, Vincent Sollitto stated.

The stock traded as low as $4.50 following the secondary offering. However, all was eventually forgiven as the company claim the secondary was necessary for growth. For a while, it seems the company was right when it raised guidance of the calendar year 07' from $950 million to $1.1 billion to $1.1 billion to $1.3 billion on July 16. The stock rebounded and formed a trading range between $6 and $7 following the news. There was a lot of optimism leading up to earnings of Q'4 of 07. Many investors thought that it can't be possibly be as bad as the previous one. However, quite a few were surprised not just once but twice.

First, on the morning of the day earnings were suppose to be released, the company announced earnings would be delayed with no explanation, which caught many shareholder's off guard. The stock fell 9% that day on heavy volume. Then the next day when the company announced earnings, there was some much bad news to overwhelm investors with. First of all, the company missed analyst's earnings estimates by a penny when many were expecting a blow out quarter. The reason they missed was because the company made an accounting error in forgetting to recognize dividends and accretion of discount on redeemable, convertible preferred stock as a tax expense which lead to a one time $5.9 million income tax expense for the quarter.

Next, the company slashed calendar guidance back to $1.0 billion to $1.1 billion just less then 2 months after raising guidance to $1.1 billion to $1.3 billion. There is nothing like raising guidance just to lower it right away to destroy investor confidence. The reason was a credit crunch in Taiwan that prevented the company from obtaining parts from their suppliers. As a result, the company only expects revenue for Q'1 of 08 at $170 million to $180 million while analysts were expecting $240 million. Another good way to spook investors is mentioning a credit crunch is hurting your company during tightened credit market conditions, which already have many investors nervous. Of course, not being able to generate over $180 million in revenue for the next quarter when the company just conducted a $128 million offering certainly does not help either.

On top of it all, you also had the CFO at the time, Wayne Pratt, announcing he was leaving for a new start-up company. Syntax-Brillian managed to release more bad news then the previous quarter and the stock fell 33% the next day on September 13. Missed analysts estimates, accounting errors, slashed guidance, a credit crunch, and the CFO resigning being all announced at the same time can do that to a stock. Following the news, Merrill Lynch, which conducted the secondary offering in May, downgraded the stock to sell and said it believes the company will trade around book value. It is not everyday that a firm will tell investors to sell a company's stock just 4 months after conducting a secondary for the company.

The only conciliation prize shareholders got was Vincent Sollitto buying 5,000 shares of the company's stock at $4.06 on September 14. Shareholders were not impressed by the move and who can blame them. The 5,000-share purchase by the CEO after a 33% decrease in the stock price is akin to losing over $20 in a carnival game and getting a plastic comb in return. The stocks continued to fall before finding a bottom at around $3.60 on September 18.

Then on October 5th, the stock closed up 27% with no news from $3.92 to $4.99. To this date, there still isn't any plausible explanation as to why there was such a huge increase. Perphaps one reason might be many investors realized that the combination of Wayne Pratt and Vincent Sollitto which helped crash the company's stock were no longer in the driver seat and started reentering the stock. Sollitto now only serves as chairman while James Li, original co-founder and CEO of Syntax Group before the merger that formed Syntax-Brillian, is the CEO.

Li certainly seems committed to increasing shareholder's value as he already mentioned it a couple of times in various interviews and with his 120-day action plan. His first order of business is to discontinue LCoS, which was Brillian Corporations only business before the merger with Syntax. The LCoS line was a money losing business and shutting it down and shifting the resources it utilized into LCD TVs might actually be a good move. Of course, investors still seem hesitant as the company's stock price is still floundering after the 27% jump in one day.

After the 27% increase that brought the stock to $5, it retraced back to $4.50 over the next few days. When the company announce their new 65" line of Olevia televisions on October 15, the stock rallied to over $5 before falling back to around $4.50 again over the next few days. It seems this is an example of the old adage; fool me once shame on you, fool me twice shame on me. Many investors seem to be taking profits after every run up and selling rather holding and risking losing all their gains and more if negative news from the company comes out and catches Wall Street by surprise.

There still seems to be an uncertainty and doubt clouding the company. For starters, there seems to be mix messages as to why the former CFO, Wayne Pratt left. The company's press release says that he left to work for a start-up company, Sollitto said that it was because his job at Syntax-Brillian was too demanding and time consuming, while James Li said it was because of health reasons. Normally if it was for health reasons the company press release will say an officer is leaving for personal reasons and that officer probably wouldn't have taken a new job elsewhere right away. Or not unless the other company has much better health coverage.

Then there is the question of the hefty short position outstanding for BRLC. It is easy for companies' management to blame short sellers for their company's falling stock price. However, the question to ask is why the short sellers are targeting a particular stock. Usually short hedge funds target stocks of companies with cash flow problems, inept management, operating in an industry where trouble is brewing, or has other problems. They don't just draw a name of a company out of a hat and short it.

Last but not least, Syntax-Brillian does operate in a somewhat highly competitive, seasonal, commodity like business. The LCD television industry is filled with many brands at both the low end and high end. At the same time, prices are declining rapidly. However, LCD televisions are still one of the fastest growing consumer electronics products. You can say it is a high risk, high reward industry that the company operates in. While the future of high definition televisions seems bright, we do not know if Syntax-Brillian will shine with it or fade away like the old analog CRT televisions being phased out.

Whether the company's stock eventually crashes and burns like the short-sellers are saying or hits the sky-high price targets from the analysts, Syntax-Brillian is certainly an interesting company to watch. We saw how the company's management manage to destroy shareholder's and Wall-Street's confidence in the company. It would be equally fascinating to see how the company will try to rebuild it. It might be a tough task from James Li and his crew to turn around the near shipwreck caused by the old captains but by no means is it an impossible task.

Disclosure: none

Comments

[It's me:]

this article is poorly written, has multiple misspellings, English errors and the research sucks. The CFO left because of accounting Irregularities that manifest because of the differences in accounting practices here and in China.

2007 Oct 23 07:34 PM

[genetuck:]

You would think that the author would proof-read an article like this before publishing it, but Edwin Climaco obviously did not. The many typos and other mistakes were a distraction. It was just a rehash of past events that shareholders remember all too well, with a couple of factual mistakes thrown in by Climaco. Better grammar would make him more credible.

2007 Oct 30 05:59 PM