INFS -- “Da Bears” Part I

Since there is a lot more bad than good to talk about with INFS, I will jump right into the bearish case. The one sentences bearish case for INFS is that the company was grossly mismanaged just as the projector industry experienced a severe inventory glut and competition from LCD/Plasma televisions.

The mismanagement at INFS over the last few years has come in several flavors …..

First, the company’s management simply failed to properly position their business for the continued price compression in the projector industry. You could make the argument that there is not way management could foretell this, even though its part of their job description. Fine ……

The real mistake that INFS made is that it significantly invested in inventory at the worst possible time. Inventory on hand increased from $62M at the end of 2003 to $155M at the end of 2004. Of the $93M increase, $73M came in the form of “finished goods” (see Note #3 of 2004 10K) which is basically finished projectors sitting in the company’s warehouse, collecting dust and depreciating every single day.

Just as the company significantly invested in inventory, ASP (average sales price) continued their sharp declines …. (all data is from the 10K’s)

2006 (vs. 20005)……-15.5%
2005 ……..-17%
2004………-20%
2003………-27%

This has cost the company dearly in the form of severe gross margin compression as INFS had to lower prices and simply write-off a big chunk of inventory in 2005. Gross Margins fell to 8% in 2005 (this includes the $27M inventory write-off) and 15% in 2006.

On its own terms this is bad enough, however this becomes even a bigger problem when you consider the fact that INFS operates in a highly competitive industry and really cannot afford such missteps. Unfortunately, business and consumer electronics is not an industry where dumb management will be overcome by superior industry dynamics.

INFS is facing severe price pressures from Asian electronics companies that can produce projectors cheaper, have diversified product lines so they can withstand some margin compression on projectors, and have superior financial position to withstand an industry shake out.

Also driving ASPs lower is the emergence of LCD and Plasma televisions as a real competitor. I called one and visited another high end home entertainment provider and my sense is that projectors (both home entertainment and fixed business use projectors) still provide a bigger and better picture per dollar spent compared to LCD or Plasma televisions in similar price range. However, LCD and Plasma TVs are simply a hot product right now and provide a good enough picture which means they are stealing sales and projector manufacturers must lower prices to compete with these often cheaper alternatives (as well as other projector manufacturers).

I will continue with other bearish aspects in the next post ……


* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.