Description
Background : Brightpoint ("CELL", or "the Company") provides distribution and integrated logistic services to the wireless communications industry.
The stock has come off 60% from its 52wk highs as concerns over the handset end market set in. More recently, the stock is down 15% since MOT’s (<10% customer) 10/07/06 earnings miss.
On 2/20/07, Brightpoint announced the acquisition of Dangaard Telecom for $300mm, sending the stock up 25%+. In Dec '06, CELL announced a smaller acquisition of CellStar's Latin American assets which is also accretive. However, negative sentiment set back in and CELL has retraced all of its gain post the Dangaard announcement.
Thesis : Our bet is consensus is not appreciating the accretion from the two announced acquisitions because:
1. The street does not know details of the deals and as such does not understand the full potential.
2. The street is focused on near term fundamentals in the handset market and is letting that negative sentiment mask the outlook 6+ months out.
We expect the stock to grind to $16 in a base case (33% upside) with another $2-$3 possible from multiple expansion back to historical norms once the street sheds the overly negative sentiment towards the space.
Detail:
1. (Unofficial) Consensus estimates for '08 EPS is $1.01. Our deltas and expectations for the corresponding change in the stock price are as follows:
a. +$20mm of purchasing synergies = +$2.00/share
i. Consensus is ignoring the economics of scale achieved with the Dangaard acquisition. CELL has suggested $60mm of purchasing synergies is possible given the consolidated distribution base for suppliers. We give them credit for 1/3 of that for conservatism.
b. +$10mm in CellStar EBITDA = +$1.00/share
i. Consensus is incorrectly assuming CELL takes CellStar's corporate overhead in Latin America.
c. -$12mm post tax interest expense = +$1.75/share
i. Street is overestimating the normalized debt level. The Company detailed to us how much inventory was bloated, how accounts payable will stretch, and why the CellStar purchase price will be ~$40mm less than what consensus expects (as a result of a working capital adjustment).
2. CELL has been especially hurt from the negative handset market sentiment because tech traders use it as a proxy for short term end market fundamentals, given its transparent business model and open management team.
a. Once sentiment bottoms and begins to turn, we can see up to 2x of multiple expansion off today's trough valuation, bringing us back in line with historical/relative valuation and adding ~$2 to our target. Remember, this is pure upside from our current $16 target.
Timing: We are most likely to get paid post the Dangaard acquisition closing as investors will begin to focus on the integration story that the CEO will be pitching. We also expect sentiment to have sufficiently turned by then.
PRICE TARGET
Target Price : 16.00
Risk Price : 9.00
Consensus EPS : 1.01
Target EPS : 1.33
Consensus Multiple : 11.9x
Target Multiple : 12.0x
EPS Delta
Our specific EPS deltas are:
1. Credit for purchasing synergies: +$20mm in EBITDA, or $.16/share
2. Higher CellStar synergies: +$10mm in EBITDA, or $.08/share
3. Lower normalized debt: -$12mm less interest expense, or $.10/share
Our conviction is derived from an in depth 1x1 meeting with the CEO with whom we have a strong relationship. We know that the average investor has not seen the same granularity on the acquisition math post the 2/20/07 Dangaard announcement. Furthermore, our read of the sentiment tells us that even if there are investors who are aware of the accretion potential, they are not willing to step in here and call the bottom on the handset market.
Multiple Justification
We believe once the street begins to look past this quarter of earnings and towards the second half of '07, they will bid CELL to a 2x discount to its historical/relative multiple of ~14x fwd. Given how quickly momentum builds and the short interest in this name, we would argue there is a nontrivial possibility the stock trades back to its historical average, yielding ~$2.50/sh of upside to our target.
Risks
There are two primary risks:
1. MOT's business does not turn around and is a drag to earnings this year and next.
2. Verizon acquires Alltel and CELL loses Alltel as a customer
Catalyst
The event path consists of:
1. Late April: Post CellStar acquisition close, analyst community formally models synergy potential and debt normalization after speaking with the CEO.
2. Early July: Dangaard acquisition closes, models are updated and CEO continues to pitch the integration story.
3. Ongoing: Sentiment in the handset market begins to bottom and turn.
4. Early May: Q1 EPS passes, the company hits the already lowered analyst estimates, and the concern over a bad print passes, paving the way for a forward looking view of the company’s prospects.