We upgrade our recommendation on Brightpoint Inc. (CELL) to Outperform based on the fact that the galloping demand for high-end smartphones and tablets throughout the world will drive the company’s valuation level higher in the near future. We believe the long-term business prospect of Brightpoint remains intriguing buoyed by the growing demand for high-end pocket digital assistances globally. Newly owned distribution contracts coupled with effective cost control strategies are likely to pave the way for Brightpoint’s future earnings growth.
We believe the termination of the proposed merger between AT&T Inc. (T) and T-Mobile USA is a major respite for Brightpoint. Logistic services are the high-margin business for Brightpoint. T-Mobile USA is one of the largest logistic customers generating around 20% of the company’s total logistic revenue. Logistic services generate only 9%-10% of Brightpoint’s total revenue, but command 49%-50% of gross margin. In contrast to T-Mobile, AT&T outsourced its activation services to Synchronous Technologies. If this acquisition takes place, AT&T may not continue with Brightpoint, which could significantly reduce both the top line and bottom line of the company.
Brightpoint has a solid global customer base. Management continues to seek new operational initiatives that foster improved customer handling of handsets, in particular PDA’s, data cards and 3G wireless devices. The company entered into agreements with large telecom equipment and services corporations, such as Research In Motion Ltd. (RIMM), HTC Corp, Apple Inc. (AAPL), and Nokia Corp. (NOK), for the distribution of handheld devices. Furthermore, the stock price is currently trading at attractive multiples with respect to several valuation metrics compared with both the S&P 500 average and its peers.
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