Brighter Days for Brightpoint? (News) December 23, 1999

Brighter Days for Brightpoint?

By Brian Graney (TMF Panic)
December 23, 1999

Mobile phone distributor Brightpoint (Nasdaq: CELL) got a boost this morning after announcing that it has extended its agreement with Nokia (NYSE: NOK) to be the Finnish handset maker's exclusive distributor in the U.S. through the end of 2001. The extension follows Brightpoint's success earlier this month in landing the exclusive rights to distribute Nextel (Nasdaq: NXTL) accessories in the U.S.

The ongoing investor lovefest with all things wireless has certainly helped brighten the outlook for Brightpoint, whose share price was left for dead earlier this year. After bottoming out at $3 1/2 per share at the end of August, the company's stock has rallied for a snappy 325% gain. Meanwhile, distributor rival CellStar (Nasdaq: CLST) has more than doubled over roughly the same span. With investors heaping their enthusiasm into the wireless sector like coal into a red-hot stove, even the small fries at the very end of the wireless food chain have received a boost.

After months of disdain for the stock's prospects, analysts are starting to change their opinions on Brightpoint. This morning, Merrill Lynch analyst Michael Ching raised his near-term rating for the firm to "accumulate" from "neutral," which follows upgrades from Legg Mason, Deutsche Banc Alex. Brown, and Warburg Dillon Read over the past few months. According to the First Call mean estimate, sell-siders are expecting EPS of $0.62 next year, up more than 150% from this year's projection of $0.24. Of course, the firm was also supposed to grow earnings 42% this year from 1998's $0.74 performance, but a blowup early in 1999 changed all that.

With the wireless industry expected to be huge in a couple years, according to various folks who spend their days thinking about these things, it follows that there should be plenty of profits to go around. What return-minded investors need to consider as the business evolves, however, is which firms will end up with the largest shares of the pie. And despite the recent run-ups of Brightpoint and CellStar, more investors have been voting with their share purchase dollars this year that the technology developers like Nokia and Nextel themselves will be the major value creators in the years ahead.

And why not? If the evolution of the PC industry has taught investors anything, it is that the indirect model of product distribution is ill-suited for the fast pace of today's business and consumer worlds. In terms of business drivers, Brightpoint's model bears close resemblance to the indirect PC distributors and value-added resellers (VAR).

On an annualized basis, Brightpoint's operating margins, return on assets, and inventory turnover ratio are substantially similar to firms like Inacom (NYSE: ICO) and Ingram Micro (NYSE: IM). Both of those firms have fallen on hard times this year as their operating models have come into question with the direct distribution success of PC firms Dell (Nasdaq: DELL) and Gateway (NYSE: GTW).

Whether Brightpoint can make indirect distribution work in the wireless sector remains to be seen, but the recent history in the PC world does not set a rosy precedent. With the emergence of the Internet and its tendency to displace middlemen, an investor with an eye toward past experience has to believe that the bulk of value creation in the years ahead will likely occur within the firms that think up the new wireless technologies themselves, not in the businesses that help get those technologies indirectly into the consumer's hands.

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