Still Loving You

 
                                                                                            (on Apr. 08, 2011)

          Time, it needs time to win back your love again.

          I will be there, I will be there.---

          If we'd go again, all the way from the start,

          I would try to change the things that killed our love.

         Yes I've hurt your pride, and I know what you've been through.

         You should give me a chance. This can't be the end.---

　　　　　　

               Quoted from song lyrics - Still loving you    
               Songwriters: Rudolf Schenker, Klaus Meine. Performed by Scorpions 

Desperate times call for desperate measures. The greatest opportunities are born from the most profound obstacles. If we can view those obstacles as opportunities, it'll serve us in good stead.

Acer bad news throws techies for a loop; Buy on Dips for Acer

An incident brought up by Acer Inc. (2353 TSE Code), the global 2nd largest NB computer maker, for its about-face in sales bets fueled massive momentum selling on its stock, another black eve for an already-smarting tech sector. Impacted by downbeat headlines that ran in websites and newspapers–"Acer falls after saying 1Q11 sales to miss forecast", "Acer CEO Lanci quits after clashing with board on strategy", and "Institutional investors dump Acer",–the tense analysts were all-but saying adieu, adios, ciao or auf Wiedersehen to Acer stock and other ODM NB stocks.

The "old-school" firm announced on Mar. 25 to slash 1Q11 sales target to a 10% decline, a far cry from originally pleasant 3% growth. The chop marked a back-to-back downward revision for quarterly shipment target from 4Q10, in which it suffered a 17% drop from a gain of 5%-10%. The damper was primarily prompted by weaker demand in US and Europe markets coupled with neck-to-neck competition from Apple's hot-selling iPad gamut.

Quake in Japan derails coattail effect

The aftershocks of Japan quake resulted into a magnitude of tear-down analysis which found pressure on the IT industry will be intensified. Fears of cocktail effect occurred in their minds that at least 5 parts supply chains from Japanese vendors: NAND flash, DRAM, electronic compass, touch screen's glass overlay sheet, and tablet's battery, will be severely disrupted, casting a shadow on global PC market. Taiwan's riding on the coattails of Japan's success had hit a snag.

Acer's Achilles' heel–Low-cost NB ?

Acer is commonly categorized as a traditional PC maker with NB accounting for 60% of its product line, of which consumer models constituting 70%. Given surging demand for tablets, its outlook has reportedly turned for the worst as operating margin will likely slip under 2% in 1Q11 from 2.93% in preceding quarter. Acer's mobile PC shipment, including contribution from its Chinese alliance, Founder Technology, tumbled to 8.4 mn units in 4Q10 from 9.1 mn units in 3Q10. For 2011, Acer expects its NB shipment to grow 10%-15% to 40-45 mn units, and its desktops to reach 10-15 mn units. It also painted a bright picture for its cellphone shipment rising to 5 mn units, up 50% YoY, based on a wider range of link with global telecom carriers.

A brutal sale environment has raised suspicion about its ability to meet the rosy expectation on sale, not in the least of which is its bottom line target. Apple, maker of the iPad tablet, iPhone and iMac computer had a 21.5% operating margin last year, while Acer had 2.3%. It's estimated by Acer that the ratio will drift lower to 0.5% to 1.5% in 1Q11, and will see a worst-scenario of remaining flat in 2Q11. What makes things worse is the fact that tablets will still cannibalize NB market share. 

It was reported that as much as 18.9% of tablets have replaced NB and netbooks in 2010, but this rate will jump to 32.1% this year and reach 35.1% in 2012. Apple's iPad devices are expected to be delivered at a volume of 65 mn units this year to take up a lion's share of global mobile PC items that include netbook PC. With market share sliding to 14% in 4Q10 from a 16% in the prior quarter, Acer dropped to 3rd place among mobile PC makers globally, behind Apple and HP which bagged 17.2% and 15.6%.

All eyes are on Acer moves to pick up the pieces

Acer tended to be cheerleader in Taiwan NB arena to set a high bar for its outlook, always maintaining optimism even affected by black swan events that included Intel's big recall of flawed chipsets. On Jan. 31, Intel found a defect in its 6 Series chipset, which support Acer's most advanced Sandy Bridge line of processors. The glitch, though likely reducing its shipment in 1Q11 by 1%-2%, is said to leave its position unscathed to hope for a 3% quarterly gain in NB sale. The firm repeated its assertion that its fortune will continue to rise in 2Q11 when its NB with the Sandy Bridge platform and new tablets will be available in the market. But that reassuring wording received a pitifully weak reaction considering the spectacular blows that the psyche of market analysts have been hit with.

Like the fashion industry and Hollywood , the tech sector relies on new products to create a buzz and boost company sales and earnings. Acer will realign its product lineup to pay closer attention to profitability, instead of sales volume policy emphasized by its previous CEO, Lanci, who focused on low-cost laptops in a bid to dethrone HP. Profitability goes to the core of Acer's future presence in computer area after Lanci departure. New business roadmap and management team will be introduced in analyst meeting in late Apr. amid a program what it describes as the 3rd corporate revitalization.

Set further sights on Tablet PC

To keep business afloat, Acer will be gearing up to tap tablet and smart-phones segments. On Mar. 18, Acer announced to kick off its first stage of churning out tablets to square off against other PC vendors in tablet universe, but output may be not sufficient enough to match global retailers' demand partly due to shortening supply of components and capacity constraint. Facing Apple iPad 2G, which was unveiled last month as a blockbuster on its advanced plumbing at an incredibly low price, Acer has admitted that it can hardly take on Apple. But confidence about its tablets outselling other competing models propelled it to ambitiously aim for a global tablet shipment of 5 to 10 mn units to post a market share of 20% this year. The firm will start promoting its tablets in Taiwan in early April in coordination with several local telecom carriers and 3C product retailers.

On its NB front, Acer on Mar. 29 started pre-sales in US of a new version dubbed the Iconia in efforts to outshine in a market dominated by Apple's iPad. The laptop features 2 high-definition 14" touch screens that can be used as a virtual keyboard, as an extended display or as a place to run additional applications. But doubts about its success as a hit product look rampant. The dual-screen configuration is an unusual twist in the industry which has been flooded with touch-enabled phones and tablets. Laptops and desktops equipped with touch functionality have not proven well-received as their more mobile peers. Sale of iPad, for example, had accelerated following the debut of its 2nd generation tablet on Mar. 11.

Roadblock might emerge in its push to China

Another chin taken by Acer might be the business trend probably working against it in China which made up 10% of Acer's sales in 2010, and the figure is conjured up to approach 13-15% this year. Last Aug., Acer acquired PC business unit from China`s Founder Technology for NTD120 mn to penetrate the market. Things were proved to be clicking as its market share was lifted to 8.6% to rank as the 2nd-largest brand by overall PC sales in the market in 4Q10, only next to Lenovo which dominated a 30% portion. No.3 and No.4 slots went to Dell (7.2%) and HP (7%), while Taiwan another own-brand PC maker, Asus (2357), was number 5 to occupy a 5.2%. In the same period, Acer came in at No .3 in terms of NB sales.

Acer's 2nd operating base in Chongqing, southwestern China, will take a 20%share of its global shipment in 3Q11, and the figure will rise to 40% this year, depending on a combined supply from 4 contract makers - Quanta, Compal, Wistron and Pegatron. Acer last month signed a pact to provide electronics retail chain Suning USD500 mn worth of computers in 2 years. Meanwhile, Acer licensed online electronics retail chain 360buy.com to offer after-sales service in China for it. It is the first ever after-sales service licensing that Acer has awarded to a Chinese retailer,

Acer might hit minor hiccups as it seeks ubiquity. Its products might be largely hidden from the public view in blistering competition with main Chinese rival, Lenovo, which is active by discounting more to attract buyers, as widely seen by the shops within airports in HK and inland China. Lenovo brand was ubiquitous with its product prices much cheaper. Price discrepancy, if all things equal, is another criteria in deciding customer preference. Possibly trying to break through a bitter log jam in China, Acer is reportedly going to cut 10% workforce there to strengthen profit, a meaning to tea readers that something bad is going to happen with Acer operation in China. A report for its standstill growth in China, if any, will make a huge splash in future.

Foreign investors emit bearish sighs on Acer

Acer, along with other Taiwan ODM NB makers, is still in the center of analysts' debate over extent to which tablets are biting NB market. Analysts' dire insights, such as margin contraction, disruption of key material and languishing NB market to be decimated by iPad, have reached a seemingly agreed-upon consensus that from Acer to ODM counters and everything in between, downside risk will overtake upside potential. Smart money fled the NB-related stocks this past week just as they said: "Acer is no more championship, and let's go to hunt the ones that will issue higher end of earnings views”.

Sell orders flooded the Acer counter from foreign investors not too long as Acer issued the sales warning on Mar. 25 when its stock closed at NTD72.8. Relentless sell-off knocked it down to NTD57.1 on Apr. 01. In their coverage on Acer, investment ratings generally were neutral to negative. Based on Mar. 30 newspapers, 5 out of 9 foreign houses made an underperform claims, 2 for neutral and 2 for sell. The aforementioned ratings were, frankly speaking, honest-to-God sell ratings if all added together.

Investment rating systems by foreign houses

In their recommendation system, some will use ratings from A to F. A system with an assigned numeric value from 1 to 5 will be put in place as well, and ratings are a translation of brokers' visions to the recommendation scale, which ranges from 1 (a strong buy) to 5 (a strong sell). Principally, when they want to buff a stock which merits a higher price and richer valuation, they will promote it as buy, outperform, or overweight. When it's time to sell a stock, they will name it as sell, underperform, or underweight. In other cases, any stock not assigned as a buy or a sell on an investment list is deemed neutral.

Hold, neutral, in line, market perform, or equal weight comes tricky, not all belonging to a same sentence to reflect a stock's expected pendulum. Sometimes, it can contain implications of a risk for losing ground. Also, those terms neither imply fully cash preservation, nor not to buy (sell), for clients' portfolios. In foreign houses, a stock assigned the rating will mean: 1) expected to remain flat or increase in value and are less attractive than Buy, 2) have a neutral outlook based on analyst's expected absolute or relative return over the investment period, 3) the upside or downside is less than 10%, 4) the stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe. In future, if you hear or read the abovementioned words (中立), you have to carefully figure out what it suggests by different houses. Then, how about let's get a consensus altogether to change that ambivalent kind of interpretations into "Taoyuan" (桃園)?  

Hold rating is almost not different from negative spin

To some extent, a hold rating carries a selling metaphor. Knowledgeable investors have long perceived that the term is, in effect, a sell signal. The stock unloading insinuations can be exemplified by the dot-com bubble. That popped to near-devastating effect in 2001 and was powered by rise of Internet sites and tech start-ups, many of which went under to get some valuable lessons when the bubble finally burst. Cisco, the onetime highflier, was so formidable that no analyst flipped its rating to a sell on its way up to historic high of USD71.87 registered in May 2000, because the network goliath acted as a major kicker for M&A activities, regarded as meat and potatoes by investment banks as a whole.

In 2001, when the US stock markets were headed south, less than 2% of the stocks followed by major brokerage houses were rated as sell; in the previous year, only 1% of stocks were touted as sell. They balked on issuing sell notes, often because their investment banking divisions wanted to gather business from the same companies, managing new-stock sales, floating debt securities, and providing financial consulting services. They can be quite profitable, and a sell recommendation by the company's analyst can cause executives to take his business elsewhere. Therefore, researchers at best issued hold rating with the flip side of it actually suggesting a sell even when the covered stock is at a worst state. To make matters worse, Fitch and S&P rating agencies were far behind trying to avoid a potential sell warning in cementing their respective client bases.      

Diverse views for expected return and time horizon by foreign houses

Questions about how they come up with assessment, or return potential, in plain words – buy, hold and sell, will lurk in investors' mind. Most brokerage firms, as they assert, use a wide variety of data, including momentum, financial strength, earnings, sales volume, cash flow, price/earnings ratios, dividend, and discounted cash flow or multiple analysis etc.. One company uses 100 variables in 7 categories to build its stock ratings. At issue, still, is what kind of relative performance they base upon in global stock market's herky-jerky trends. Initially, they will roll out a to-be-expected price, such as target, fair or intrinsic value, and then simply tip a targeted % of gain/decline of any given stock, or compare that with certain gauges for relative strengths. But things are certain that their notes are subject to their discretion, and in need for a revision or reversal, if condition warrants.

Briefly speaking, their rules include: 1) a stock absolute price return relative to the analyst's sector, not the overall market, 2) relative to the average total return of the analyst's industry (or industry team's) coverage universe, 3) as compared to relevant local indices, 4) relative to benchmark return, 5) relative to companies in its industry, 6) absolute upside or downside, which they define as (target price - current price) / current price, or 7) absolute valuation upside (downside), which is defined as (fair value - current price)/current price. As for the investment period or time horizon associated with a stock price target, there's also a variety of definition stated in a bracket from 5 to 15 months. Their ways to define a potential price gain, indeed, will drive you mad and deserve serious rethinking before jumping onto their bandwagons.   

Too much complaint about Acer

In the case of Acer, foreign investors this time play nicely, not because of their sell callings, including hold ones, to denote lower valuation in Acer, but because of the fact that a jump-the-gun effect didn't sneak into market in the lead-up to Acer's shocking shift of sales projection, - avalanche of selling orders by foreigners just came after the bad news was released. However, to receive a sell rating by any listed firm shouldn't cause a whole lot of fuss among market participants. Analysts' logic to behoove their clients to be cautious sounds reasonable yet panic, and Acer's paltry outturn in essence earned it a downgrade.

Sell notice is easier to appear in full forces in the big-cap especially heavily invested by foreigners. Foreign houses can haul in a significant chunk of brokerage fee by suggesting a stock switch to slice holding in Acer which is now 46%-held by foreigners. Though the level is still far below that highest one of 76% seen in Delta (2308), Acer's successive, disheartening moves had stirred up criticism and complaint. Analysts in foreign houses might have been degraded for their accuracy on Acer profit profiles and run the gauntlet of sharpening barbs and negative rhetoric from clients and supervisors. Acer's target price  was then undoubtedly slammed to a band as low as NTD46.2, with room to be pulled lower by those late-to-the-party analysts. As a result, bears will be on parade against Acer at least in the short term. But how can you complain about their readjusted judgment after their pride had been taken away so much by Acer?

There's no sense missing out on any buying opportunity for Acer, which has a checkered past when it comes to encouraging the market. It was mired in a large-scale restructuring effort in 2000 when it split off two subsidiaries, Wistron (3231) and Benq (2352). Much earlier in 1992, the firm bounced back into black, a big push assisted by government sending its stock upgraded back to the main board from the full delivery column which requires full payment for stock purchase in advance. Its stock trading code on the TSE was then recoded as 2353 from previous 2306. Acer at the moment seems well situated in running into a make-or-break crossroad, justified by its prior behaviors.

Acer has plentiful cash to burn

As of 3Q10, its cash and cash equivalents stood at NTD4.65 bn, a level to be lifted further to a 5-year high for 2010 results in which it cornered a sturdy EPS of NTD5.58. The unaudited EPS is loftier than NTD 4.31 in 2009 and may well prove to have stood it in good stead to budget expansion into the much-anticipated fields - tablet PC and smartphone. Its ROE and ROA for 2010 should surge to 16.2% and 6.22%, up from 13% and 5.79% in 2009. Both the figures top an 8-year peak, making it a cogent case that Acer's operational ability has been in a sound footing. Debt ratio hit 60.67% as of 3Q11, a steadily growing trend that jibes with the NAV per share of NTD34.98. Albeit not a risk-free play, Acer has pleased its investors by paying out an average annual cash dividend of NTD2.8 per share after 2001.

Far from being a pricey stock, Acer is currently traded at trailing PER around 10X. Even assuming a fallback of EPS to around NTD 4.5 in 2011, the stock is perched at a forward PER of 12.6X. While its current business models may not necessarily translate into a decently-undervalued stock, or deserve a PER premium enjoyed by handset makers such as HTC, the recently drastic downturn could be partly attributed to macro environment. Taiwan stock market is still exhibiting an inexpensive trait hovering at a trailing PER multiple around 15X, as compared with that of 35X-40X during its heyday when rocketing over 10.000 points. In the context of stock market future course, the island somewhat requires more hoped-for events and improved competitiveness to boots. If those factors materialize, the market will be then assigned a higher weighting in global emerging indices.

Acer management is half-full - Stock buy-back program

Another trump card on Acer's hands is stock buy-back determination. It had swiftly reacted to falling stock price by unveiling a buy-back program which will call for pro-forma NTD3.2 bn cash to repurchase a total of 54 mn shares. Effective on Apr. 01, the rescue, though not compensating for the troubles caused by sequentially missing its numbers as stock slipped further, will trigger a faith-based technical rally and lift investor mentality in future. Anecdotal evidence suggests that a buy-back by Acer has always aligned with market ebb-and-flows in the past. As was often the case in its historical pattern, bears flinched as Acer rebooted buying spree after a failure to support prices.

It's a rare reality that a listed firm launches a buying program in the immediate wake of downward adjusted forecast, a signal that management is much more convinced to see better times ahead - and is taking steps to ensure that it get shares of the pie. In doing so, Acer will make its opinions a self-fulfilling prophecy. Its well-positioned global footholds and customers' solid loyalty to its brand-name should lead to a higher implied value that entitles it a buy. A report indicates that Taiwan's top-10 global brands in 2010 again places Acer at the top with brand value of USD1.40 bn or about NTD45 bn.

No need to blame doomsayers

Chances and alternatives still exist for Acer to catch up with Apple which, however, can't eat up the entire tablet crowd. While battle of other tablet makers has been heated up for the fractional market share left over by Apple, those firms with substantial and long-standing brands, attempts to diversify to adjacent markets such as rapidly-expanding e-books and smartphone, as well as all-out forces to reinvent themselves will likely stand out in global tablet race. To Acer, the current plight is involving more a retool scheme, rather than a story of phoenix rising out ashes as in 1992, though over the short-term, it can't usher in a cherry-on-the-top scenario. At worst, iPad threat could squeeze out a 10%-15%  of the population that opts for its low-cost NB that Acer championed. 

Acer is still a proxy for Taiwan NB computer and tech industry. The simplest way for a manager to beat the market, in theory, is to cheery-pick attractive bluechips on market weakness. That doesn't mean investors can make quick money off the faltering Acer stock at present, but buying opportunity will take hold once foreigners end stop-loss selling or portfolios reallocation. A stronger buy can be ready until listed firms reveal 1Q11 results in late Apr. Finally, there's no need to spell curse on Cassandra.

Good Luck !
Link to Still loving you - http://www.youtube.com/watch?v=SUMcA--ejOc