In PC-land, investors can talk Dell versus H-P all day long, but the one company that would be the absolutely hardest to fix in the sector is Gateway (GTW-NYSE). This may be the easiest one to kick and it is one that has been down for a long time. There are at least some positives in the company, but Gateway can’t just be reliant on an upgrade cycle to fix the company.
Back before this company acquired eMachines, it made a horrible decision or at least failed to make an obvious decision that could have locked-up all the PC business of many Americans for two upgrade cycles. The company at the time of September 11, 2001 was actually the ONLY entirely "MADE IN THE USA" PC maker. Sure the parts are global commodities as in all electronics, but they company could have gone with a "Buy American" or something and they could have replaced the black cow patches on the box with blue and red. Now that it owns eMachines and since eMachines sells in so many retail outlets the company cannot claim that.
Its initiatives elsewhere have failed to deliver. The retail box stores were so bad that even Apple was reluctant to expand because of how large a failure Gateway Country Stores were. Then when the company went for the corporate push it apparently never received the memos that tech departments and corporate buyers make fun of Gateway. Its commercials never won the hearts of technophiles.
There used to be a balance sheet that offered a floor, but now that is gone. If you back out the company’s Goodwill, Intangibles, and "other" it has $1.36 Billion or so in stated assets before you begin questioning how solid the plant values and the receivables really are. Its current liabilities are $1.018 Billion and it carries a ‘stated total liabilities’ after long-term debt of $1.387 Billion.
The GTW stock has a 52-week trading range that is $1.30 to $2.45 andshares are currently at $2.01. Its net income was actually less in Q4than in Q3 even though revenues were higher: Q3 revenues $963 millionand income $18.1 million & Q4 revenues $1.02 Billion and net income$11.5 million. Its actual earnings were boosted by tax settlements.They are expected to post a profit of $0.10 EPS for fiscal 2007 onrevenues of $4.15 Billion. Its total revenues were $3.98 Billion in2006 and $3.85 Billion in 2005. So we are looking for a growth at thesame time that H-P is winning in the coolness factor, when Lenovo inChina has issued layoffs in the lower-end PC operations, and when Dellis just starting to try an unknown turnaround plan. All of these willmake it hard for the company to win any serious traction. It alsoturned down $450 million for its retail operations. The market cap onthe stock is now about $750 million; so it is cheap on X-Revenuesbasis, but its inability to post any large earnings makes this onetrade at a higher multiple than its peers.
The company is going through more layoffs that it hopes will trim $20million to $25 million in annual expenses. Unit sales of personalcomputers fell 5 percent to 1.29 million, giving the company a 6.6percent share of the U.S. market; and it can possibly use the sameblame game (and it did) as others in the PC sector about the delay ofWindows Vista to January 2007. Company officials said they would alsofocus on sales to education, health care and government and increaseemphasis on consumer-direct marketing. If the company can claim the"MADE IN USA" aspect in its government related PC sales then it has ashot. Selling to government is tricky business, so this part is a cointoss.
Firebrand Partners owns more than 10% of the company now and hasrequested that if the company can’t fix the problems that it should putitself up for sale. And what about that poison pill provision that issupposed to be terminated? It likely won’t go make a new retail push onits own, it sells all the peripherals (PDA’s, MP3 Players, DigitalCameras, and Projectors, etc.) already so what else can it unveil?They company already tried plasma TV’s. They did unveil storage areanetworks last year. If this management team fixes the company it willgo down as one of the best tech turnarounds ever. But how will they doit? A buyout would fix the current situation, but there are enoughholders that are buried in this name as “long and wrong” that getting amerger approved would not be a shoe-in. Even if someone really wantedto acquire this they would probably only do it if the stock took a hugebeating and after enough low-price shareholders have been in it thatthey would approve a deal out of desperation. Ed Coleman was named CEOin September, and it is doubtful that many envy his position. Itsnotebook sales were a bright spot and strong enough you would wonder ifthey would just throw all of their might to that area, but this wouldrequire a redirection and probably another write-down.
Before you think this is just picking one someone while they are down,please understand that I have had nothing good to say about them since2000 on a relative basis to the rest of the PC industry. It has neverseemed on the ball after the huge run from the mid to late-1990’s andsince they didn’t use the "ALL AMERICAN" feather they failed to capturethe hearts of America. This has been painful for long-term holders,but any new holders going into the stock here may be using more Hopethan Fundamentals even if it is a $2.00 stock.
There was a fund manager predicting this could hit $5.00 recently, so it isn’t as though there aren’t some in higher hopes. We have also noted that similar to a Sun Microsystems investment that a private equity firm could step in with a sizable investment to help turn the company, but that will still be a quasi-recapitalization and likely take on a further leveraging to the balance sheet. This ongoing war with Intel & AMD and what has been a low price for DRAM may also help the company in its cost containment efforts. The company has elimiated its rights issue and the poison pill issue may still be outstanding. So there are at least some positives and we don’t want to portray only the negative.
For this to work out in the long-run it really needs to conduct itslayoffs rapidly, needs to figure out a way to recapitalize its balancesheet to a slightly better level (if that is possible), needs to embarkon more targeted ads that makes the company “cool” again to consumers,needs to focus perhaps on more notebooks and maybe government sales,needs to eliminate all stops for a potential buyer, and needs to makesome better partnerships. We do wish them luck in their endeavors andactually hope they can turn this around, but at the same time we arenot envious that it isn’t our job to fix this one. At least we havelaid out a quasi-game plan for the company, but this still might notfare well for current holders.
Jon C. Ogg
March 6, 2007
Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.
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