Syntax-Brillian Sinks on Disappointing 1Q, Likely To Fall Further

Syntax-Brillian (BRLC) fell 9% on Monday, November 12 closing at $3.56 after investors fully digested the company's first quarter results announced on Thursday, November 8. It seems that the investors that decided to bail out before earnings, as mentioned in my previous article, made a wise move. Syntax-Brillian has a history of disappointing investors after each earnings report and this one failed to buck the trend. Although it can be said that this earnings report is a smaller disappointment compared to the previous ones. Of course, expectations has been dramatically lowered when the company slashed guidance back on September 12 and declared a credit crunch in Asia was hurting the company and its suppliers. For their first quarter, the company had a loss of $13.5 million on revenue of $150.6 million. The most damaging part is the probably the company's falling gross margins, falling average screen price [ASP] and failure to provide guidance to investors.

For the first quarter, the company had gross margins of only 13.7%. That is dramatically lower then the 20% gross margins the company had last quarter and the 20% they had for their fiscal 2007 year that ended June. On August 7, 2007, when Syntax-Brillian Corporation presented at Canaccord Adams 27th Annual Global Growth Conference, the company had a targeted model of 20% gross margins. In its latest presentation on November 5, in the American Electronics Association Classic Financial Conference, Syntax-Brillian had lowered its gross margin target to 17%. Considering further price cuts and price wars for LCD TV makers during the holiday shopping season and ahead, the company margins may further deteriorate.

Syntax-Brillians average screen price [ASP] also dramatically fell during the quarter. ASP for the first quarter was only $550 according to John Hodgeson, the company's CFO. For the company's previous two quarters, ASP was around $660. Compared to last year's first quarter, ASP was $596.

Although the company did not provide guidance for their next quarter, one analyst was clever enough to ask the company's maximum production capacity for the quarter during their conference call. James Li, the CEO and president of Syntax-Brillian, stated that maximum production capacity is around 550,000 units. With an ASP of $550, it can be estimated maximum LCD revenue is around $303 million. Even if ASP improves to $600, LCD revenue would be around $330 million. Vivatar revenue should be between $15 to $20 million for the second quarter. It seems that unless ASP increases dramatically quarter over quarter, Syntax-Brillian's revenue will fall short of the analyst consensus estimate of $386 million. The company had previously estimated revenue for calendar 2007 at $1 billion to $1.1 billion. In order to do so, the company will need revenue of $481 million to $581 million for their second quarter. It also appears the company will be unable to meet their previous guidance of $1 billion to $1.1 billion even though it already has been reduced from $1.2 to $1.3 billion on September 12. Syntax-Brillian is now trading at $3.56, near its 52-week low. However, the stock appears to somewhat overvalued and has some room to fall. The current trailing P/E ration for the company is now around 11. With the company operating in a seasonal, highly competitive, commodity-like, industry in addition to all the perceived risk and uncertainly, a fair P/E ratio is somewhere around 8 or 9 which the company has been trading around for the past two months. That places the company around $2.60 to $3.00, which is around or slightly above its tangible book value of $2.67 per share.

It might not be surprising to see the company trade for less then its book value before finding a bottom. It might not be a bad idea buying the company's stock at around $2.75 or less since the degree of risk is lower then the current price. History for the past year has shown that the Sytax-Brillian's stock has recovered around ten to twenty percent after each bottom is established. However, I would not hold on for long since history has also shown that after each earnings report, the stock forms lower lows and lower highs.

Disclosure: none

Comments

[Arohan:]

You forgot to mention that Syntax-Brillian is a very fast growing company (>200% over last year, projected 80% growth in the coming year), it is sitting in a sweet spot in US market (mandatory conversion to HDTV coming up), in China (Olympics and general demographics and increasing consumerism) and Latin America. While the commodity market comment is true, BRLC has its supply chain optimized to the level that it is running rings around its competition for profit margins per set sold (think Dell in its early years).

And then, the quality of the lcd tvs they produce is so high that Syntax-Brillian is able to raise prices and is quickly climbing the ranks towards a tier 1 status

For a speculator looking for short term profits, this may be a really bad stock to get into (as you imply). They are a favorite hunting grounds for short sellers. However, if you are a patient investor willing to wait for some time to reap significant profits, now is probably the best time to buy this stock

Please refer to the two articles we have written about BRLC below

arohanvalue.blogspot.c...

arohanvalue.blogspot.c...

The stock is again down today, getting very very close to its book value.

So today you have a stock trading close to book value, growing at 80% a year (future growth), trailing PE of 8, giving a PEG ratio of 0.1 or lower (lower if you use the forward PE)

A rational investor should look at aggressively buying the stock here instead of selling it as you seem to be advising

Sorry to disagree, but generally the secret to investing success is to buy low

-Arohan

2007 Nov 13 12:31 PM

[RC Martin:]

Great detail particularly as it would appear directed toward earnings and revenues going forward. Interesting omission of the $56MM not booked last qtr and the receivables which are being booked as collected. Receivables upwards of $123MM, which together with the $56MM represent $179MM of revenues you appear to OVERLOOKED.

You recommendations , complete with price targets etc. cause me to ask if you're properly LICENSED to be providing analysis and forecasts for the firm using this public forum. Registered Investment Adviser? Professional CFA licensed by the SEC? Or Carnival Barker working for unscrupulous characters? How can one tell? Well I didn't see any representation as the the first two so that narrows the the options in my opinion.

2007 Nov 14 12:51 AM

[RC Martin:]

Great detail particularly as it would appear directed toward earnings and revenues going forward. Interesting omission of the $56MM not booked last qtr and the receivables which are being booked as collected. Receivables upwards of $123MM, which together with the $56MM represent $179MM of revenues you appear to OVERLOOKED.

You recommendations , complete with price targets etc. cause me to ask if you're properly LICENSED to be providing analysis and forecasts for the firm using this public forum. Registered Investment Adviser? Professional CFA licensed by the SEC? Or Carnival Barker working for unscrupulous characters? How can one tell? Well I didn't see any representation as the the first two so that narrows the the options in my opinion.

2007 Nov 14 12:51 AM

[RC Martin:]

Lets try this again since the original posts was swiftly removed.

1) The article by Loren Paz is careful to point out in detail the authors opinion and knowledge of facts. Omitted are significant pieces of FACT that would certainly changed the message if included in the above. Such as the $56MM of revenue to be carried over to the December quarter and the Asian receivables of $123MM which are booked as revenue as received. That's $179MM of revenue unaccounted for by our author. Why? Those two items were clearly revealed to anyone who listened to the conference call.

2) The author is "advising" price points and values and I think it is only appropriate the author reveal he/she IS licensed to do so. Is the author a Registered Investment Adviser? Is this author a CFA, certified financial analyst? Or is this author a writer with a biased opinion and intends only to discredit a firm for personal gain.

Readers have a right to know.

2007 Nov 14 08:52 AM