Macro Tsimmis

intelligently hedged investment

BUY Syntax-Brillian (BRLC)—US HDTV company

Posted by intelledgement on Wed, 26 Sep 07

There aren’t many fast-growing US electronics companies these days, but Syntax-Brillian (BRLC) qualifies. The company designs, develops, and distributes LCD HDTVs (liquid crystal display high definition TVs, in this case, the critically acclaimed “Olevia” brand advertised on ESPN) and seeks to market LCoS (liquid crystal on silicon) technology, if it ever catches on with the consumer.

Although headquartered in Arizona, the company subcontracts manufacturing to enterprises in Asia, which makes for some attenuated logistical lines of supply, but enables them to aggressively manage production costs. The company has been growing revenues and despite a fiercely competitive LCD HDTV retail market with falling prices, has cut production costs and maintained a healthy profit margin. In their 2007 fiscal year—which ended 30 June—the company had $698MM in sales and a profit of $30MM, up from $193MM in 2006 revenues and a loss of $19MM.

There have been some trouble spots, however, and the stock price is down from the mid-$9s at the beginning of the year. Some Asian suppliers are having difficulty getting credit, which has decremented the units available for sale. And while the 2008 results were strong overall, the 4Q08 ending 30 June was a penny of earnings below analysts’ expectations (11 cents per share instead of 12) and the 2009 guidance was weak: sales of only $170MM-to-$180MM in the current quarter—which would be a decline from the $205MM last quarter and well below the $250MM analysts were expecting. Essentially, the stock is back where it was a year ago, when it was still losing money on less than one-third the sales.

So this is a relatively high-risk/high-reward situation, which will require close monitoring. We are betting here that this is just a hiccup and that in the long run, management can keep their balance in this volatile and competitive market while positioning themselves for future growth should LCoS technology prove marketable. In that scenario, there is significant growth potential here. If the supplier issues continue, however, the rapid growth story will rapidly dissipate.

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