Techsmart
Big-Picture Potential
By Nicole Ridgway Published: November 22,
2006
COUCH POTATO SEASON is heating up. The thermostat is
plunging and holiday shoppers are eyeing this year's lineup of new
products that'll keep them and their loved ones glued to their
La-Z-Boys. What they'll find is high-definition everything: gaming
consoles, camcorders, DVD players. But none of these graphically
stunning gadgets will be fully appreciated without a brand new
high-def television set to show them off.
At least that's one of the things big electronics makers are
banking on. Huge brand names like
Sony (
SNE: 40.04, -0.23,
-0.6%) and Samsung are duking it out to grab the hearts and wallets
of the countless shoppers expected to buy HDTVs this holiday
season. (After all, you can't fully appreciate that new high-def
Sony PlayStation 3 or that Sony Blu-ray high-def DVD player without
a Sony high-def television set.) Their weapon of choice: price
cuts.
On average, prices for some of the more popular HDTVs (sets ranging
from 30 inches to 42 inches) have fallen 30% since last year, says
Riddhi Patel, a principal analyst at market research firm iSuppli.
"It's the best situation for customers," says Patel. "The features
are improving and the technology is improving. On the other hand,
prices are declining."
Consumers know a good deal when they see one. In 2006, some 10.9
million LCD flat-panel televisions will ship in North America, up
almost 90% from the 5.9 million shipped in 2005, projects iSuppli.
Next year, the firm expects somewhere between 17 million and 18
million LCD units to move, outpacing sales of the traditional
cathode-ray-tube televisions that we grew up with. (Short for
liquid crystal display, LCD units are already outselling plasma
TVs, the other flat-panel alternative, by roughly a 2-to-1
margin.)
For investors, spotting a bargain in the HDTV space takes a lot
more than comparing prices on
Best Buy's (
BBY: 55.84, +0.28,
+0.5%) web site. The market is crowded with companies that are far
from household names. Patel has counted at least 90 HDTV outfits
across the globe. Many of them are privately held. Investors also
need to keep in mind that furious price competition from the
consumer electronics behemoths Sony,
Hitachi (
HIT: 58.21, -0.07,
-0.1%) and Samsung has the makers of these sets squeezing profit
margins to dangerous levels. A company's sales growth may look
phenomenal in the quarters ahead, but the bottom line could
dramatically disappoint.
"The manufacturers shake their heads when they talk about this
situation," says Ross Young, president of DisplaySearch, a display
market research outfit. Indeed, the HDTV bonanza doesn't promise
the most predictable investment scenario when it comes to profits.
But there's still plenty of room for growth in the high-def
marketplace — that is, if you can stomach the risk and keep a close
eye on your investment's profit margins.
Promise Is Crystal Clear
One of the Davids in this Technicolor land of Goliaths is
Syntax-Brillian (
BRLC:
8.78, +0.37, +4.4%) . A pure-play in the high-def
television space, Syntax-Brillian was formed in November 2005 when
privately held Syntax Groups, the maker of the Olevia brand of high
definition-ready LCD TVs, merged with Brillian Corp., a publicly
traded manufacturer of high-definition televisions that uses its
liquid crystal on silicon (LCoS) microdisplays technology. (LCoS
uses liquid crystals and mirrors to create high-resolution images.
The technology is typically used in large-screen monitors and
projectors.)
The merged company, which is based in Tempe, Ariz., now sells a
line of low-cost high-def LCD television sets under the
Olevia and Brillian brand names. Thus far,
it's holding its own against the big guns in the marketplace.
According to DisplaySearch's Young, Syntax-Brillian's high-def
televisions rank 12th in both the U.S. and China. During the third
quarter, the company's market share dropped below 3%, but Young
believes the company will pick up the slack in the fourth quarter.
"They seem to have the lowest prices for Black Friday," he
says.
But it's the groundwork laid to grow the company's business past
the holidays that could turn Syntax-Brillian into a more formidable
player in the market.
Jonathan Dorsheimer,
an analyst at Canaccord Adams, points out that Syntax-Brillian has
created a viable presence in the North American market without the
aid of having a major multinational retailer hocking its
sets. (Canaccord Adams makes a market in the company's
stock.)
Now,
Circuit City Stores (
CC: 24.21, +0.11, +0.5%), one of the
largest electronics retailers in the nation, has agreed to sell the
Olevia sets in what Dorsheimer says is a 60,000- to 80,000-unit
deal. His back-of-the-envelope calculations estimate that the
Circuit City deal alone could bring in roughly $32 million in sales
for the company. For fiscal 2006, which ended June 30, the company
had revenue of $193 million. Given that Syntax-Brillian says it
shipped a total of 144,000 units during its latest quarter, it's a
sizable coup for the company.
OLEVIA 27" 2 Series LCD HDTV: http://www.circuitcity.com/ssm/Customer-reviews-for-OLEVIA-2…
OLEVIA 32" 2 Series LCD HDTVhttp://www.circuitcity.com/ssm/Customer-reviews-for-OLEVIA-3…
The company's recent acquisition of camera maker Vivitar, which it
bought for $26 million in stock, could expand things even further
abroad.
Adding Vivitar will not only give
Syntax-Brillian a distribution channel in the fast-growing European
market, but also the possibility of an "in" with
Wal-Mart Stores (
WMT: 48.03, +0.22, +0.5%), says Dorsheimer. He
expects these new channels will help the company grow its North
American market share to 7% in 2007 and perhaps to 10% down the
road. "Next year is going to be quite an exciting year for
Brillian," he says.
Little Margin for Error
All of these moves spell promising sales growth for the company.
However, with the price wars expected to continue, Syntax-Brillian
will need to monitor carefully its profit margins. The recent
opening of a manufacturing facility in Ontario, Calif., which the
company says will help reduce shipping and tariff costs, could
improve margins by 4% to 6% when the factory is fully up and
running next year, says Dorsheimer.
In the meantime, the company's first-quarter report for fiscal 2007
has brought some encouraging news. During the three months ended
Sept. 30, the company improved gross margins on its LCD TVs to
20.92% from 18.55% in the previous quarter. Not only was revenue up
218% to $87 million from the year-ago quarter, but the company
reported a profit of eight cents a share, handily beating a Thomson
First Call consensus estimate of just a penny a share.
Management also raised projections for the December quarter,
putting sales at around $160 million to $170 million excluding
revenue from its Vivitar purchase (including Vivitar puts the range
between $178 million and $190 million for the quarter). Earlier
this month, Robert W. Baird & Co. analyst Tristan Gerra raised
his estimates for the company's fiscal 2007 earnings to 43 cents a
share from eight cents (his new figures include the Vivitar
purchase). He also raised his price target to $10 a share from $8
noting that he expects the company to "add one large retailer this
quarter and another one in calendar 1Q07."
There's little doubt that Syntax-Brillian is in the right market at the right
time, as evidenced by the stock's sharp run-up in recent
months. However, investors should keep in mind that like many small
caps, Syntax-Brillian is prone to short-selling and volatility.
Case in point: Its shares began this year at $4.80, dipped down to
$2.10 in May and are now trading just shy of the 52-week high of
$8.98.
Needless to say, Syntax-Brillian's stock
isn't for the feint of heart. For action junkies looking to get in
on a market that's expected to grow by double-digit percentages in
the years ahead, Syntax-Brillian is one HDTV play that has the
potential to keep you on the edge of your La-Z-Boy.
http://www.smartmoney.com/Techsmart/index.cfm?story=20061122…