SYX

[David Randolph]

Good morning !

I was studying stocks and found SYX, which is way undervalued, considering the recent turnaround in fundamentals. The stock was advancing firmly, but then the company said it would delay the Q2 results presentation so it fell 50% in just 2 weeks  . Now, with results out, the stock is coming back ...

Here's the full analysis I made with the trading plan at the end:

«1. Introduction

SYX has been a big mover, with big gaps up and down. I want to know what's up with this stock, why so much volatility? Also, on August 30 something relevant happened, because the average volume was consistently higher since that day.

SYX also made a partnership with 8X8, a current holding of the 3 Stocks on Fire Portfolio.

2. Profile

Systemax, Inc. (SYX) operates as a direct marketer of personal desktop computers, notebook computers, computer related products, and industrial products in North America and Europe.(complete profile here)

3. Technical Analysis
3.1. All History Chart



SYX made its IPO around $18 in 1995 and rose to $50 in 1996. Then the share price collapsed to $1 . Made a long term base and recently bulls took control of it again.

3.2. Medium Term Chart



The stock was moribund until something happened in late August, 2006. I want to know which news were out on points 1, 2 and 3 on the chart.

Point 1) Systemax Reports First Quarter 2006 Results Net Income Increases to $17.6 Million from $2.6 Million
Point 2) Systemax Delays Reporting of Second Quarter Results
Point 3) Systemax Reports Second Quarter 2006 Results Net Income Increases to $.19 Vs $.04 Per Diluted Share

3.3. Short Term Chart



The short term trend is bullish.

4. Fundamental Analysis
4.1. Number of Shares Outstanding



The share count remained stable since 1995, which is remarkable. This means the share price correctly reflects the company's value on an historical context. The current market cap is 36.98 million*$14.2 = $525 M.

4.2. Liquidity



Working capital is now $203 M, with $52 M in cash, $148 M accounts receivable and $217.5 M in inventories. There's no long term debt, just $225 M of accounts payable.

The balance sheet is ok.

4.3. Revenues



Revenues are up since 2002 and annualizing the first 6 months results I get $2.24 B in revenues for full fiscal 2006. Probably the number will be higher than this because there's some seasonality on Q4, so, say revenues will be $2.4 B in fiscal 2006, up 13.5% from 2005 levels.

The revenue multiple is $525 M/$2.4 B = 0.22. The industry average is 0.7.

4.4. Profits



I'm expecting fiscal 06 EPS of at least $1.12. The earnings multiple is $14.2/$1.12 = 12.7. The industry average is 24.

5. General Overview

Technical analysis shows a bullish picture. SYX passed the share count test and the balance sheet test. There's double digit revenue growth and EPS is coming back after big restructuring in the 2000-2004 period. I estimate EPS of $1.12 for full fiscal 06 (without special items, which were positive), but this number can come in higher because I'm not taking into account the seasonal effects. It can be $1.20 or $1.30 a share ...

The revenue multiple should rise from 0.22 to 0.70, because the company is back on profits and there's strong revenue and EPS growth. This implies a 218% advance on the share price, from the current $14.2 to $45 a share.

I consider SYX an attractive investment.»

6. Trading Plan

Buy SYX around today's open, 6.66% of capital as always.

[David Randolph]

It's hard to buy a stock and immediately see it tank 6.7% as SYX did, I know. Perhaps, since this was no breakaway gap (a gap over a resistance level), I could have wait to buy when the gap filling process developed, and not right at the open. A lesson for the future on short term timing.

I guess the stock will close the gap, at $12.58. After that I expect the bullish trend to resume and the stock to push much, much higher than current levels.

Fundamentals say it should rise 200% to be correctly valued. This inefficiency will be corrected, but of course it will take time. I have time.

I'll continue holding SYX.

[yukiii]

looks like Revenues are down past 2 quarters
582k 574l and 554k last quater.
take away the tax rate break on the 1st quarter and i don't see much growth going forward.
What am I missing?

[David Randolph]

looks like Revenues are down past 2 quarters
582k 574l and 554k last quarter.
take away the tax rate break on the 1st quarter and i don't see much growth going forward.
What am I missing?

Thanks for your question yukiii, I love questions

Let's see.

looks like Revenues are down past 2 quarters
582k 574l and 554k last quarter.

Correct. This is a seasonal effect, revenues always go down in Q1 and Q2 and then jump a lot in Q4, check this quarterly revenue graph:

take away the tax rate break on the 1st quarter and i don't see much growth going forward.

Tax break? I don't think it was that significant:

«Income tax expense was $9.9 million in the first quarter of 2006 and $1.9 million in the year-ago quarter. The effective income tax rate for the first quarter of 2006 was 36.2%, compared to 42.5% in the year ago period. The effective income tax rate was lower in 2006 primarily as a result of income earned in the United Kingdom for which the tax provision has been offset by the reversal of a deferred tax valuation allowance previously recorded against the deferred tax asset for our United Kingdom carryforward losses. Changes in the mix of U.S. and non-U.S. earnings over the balance of the year and changes in the valuation of deferred tax assets could have a significant impact on the effective tax rate for the year.

As a result of the above, net income for the first quarter was $17.6 million, or $.51 per basic share and $.48 per diluted share, compared to $2.6 million, or $.08 per basic and $.07 per diluted share, in the first quarter of 2005.»

Ok, we had $0.48 EPS in Q1 and $0.19 in Q2. Q4 is always the strongest quarter, so we'll probably get at least another $0.67 for the remaining two quarters of the year. This means $1.34 EPS, the earnings multiple would be $12.95/$1.34 = 9.66 (the industry average is 23.3). Also, the revenue multiple at SYX is 0.22 and the industry average is 0.68.

Technically the stock almost closed the gap at $12.58, but the low of the day was $12.64. I don't know if the decline phase is over, but I remain confident that in 2 weeks or so SYX will be trading above $15.

I'll continue holding SYX.

[snowcat]

Their big dip in Oct (when I owned it) was due to reporting delays.  Their business is very competitive.  Their numbers look good, but I am concerned that their problems go beyond reporting delays.

[David Randolph]

Their big dip in Oct (when I owned it) was due to reporting delays.  Their business is very competitive.  Their numbers look good, but I am concerned that their problems go beyond reporting delays.

Yes, I share that concern snowcat. But I put everything in historical context and I don't see any problem with the company, just not filing when they should. Let's see if they deliver on that promise of reporting Q3 in mid December, they're catching up.

Technically the stock almost closed the gap at $12.58, but the low of the day was $12.64. I don't know if the decline phase is over, but I remain confident that in 2 weeks or so SYX will be trading above $15.

I said I remain confident that the stock will be trading above $15 in two weeks. That was on Monday, so I'll do nothing and wait until Monday, December the 11th to see if I was right or wrong.

Will continue holding SYX.

[soxguy]

in at 12.90.  let's go to 15!  soxguy

[TD]

I'm in @ $14.25 let's go to $18.55....please

[soxguy]

hey td,20 would be even sweeter. we'll see.  soxguy

[David Randolph]

hehe, don't get emotional on this guys

SYX wasn't able to close the gap completely, which is even better ! There were too many people trying to buy the dip, so it couldn't reach $12.58. I like that.

Also, the stock is coming back on higher volume after touching the 50 day SMA support.

The company released a press release yesterday: TigerDirect.com Launches Huge Holiday Sweepstakes - Giving Shoppers a Chance to Win one of 20 Sony PlayStation(R) 3's, 20 Nintendo Wii's, and 20 Microsoft Zunes over the Next 20 Days

Don't you like their website, www.tigerdirect.com? I do. I think this profitable business with $2.24 B annual revenues should be worth more than $474 M, don't you?

I'll keep on holding SYX.

[thai626]

I'm in on SYX at 12.95.  Okay SYX.......you can go up now 

I shouldn't have modified my original buy order at 12.80.  O well..........

Good luck all!

Thai

[David Randolph]

I'm glad you joined us on SYX thai626

I was surprised to see it trading down on Friday, despite the weakness in the general market. Anyway, support at $12.68 held, and the stock still didn't close the gap at $12.58. Perhaps that's what its missing for a trip above the $14.72 high.

I'm not willing to let go of this stock that easily, since fundamentals are very attractive. I'll continue holding SYX whatever happens to the share price.

[David Randolph]

Finally, SYX closed the gap !

I said this on Friday's update:

I was surprised to see it trading down on Friday, despite the weakness in the general market. Anyway, support at $12.68 held, and the stock still didn't close the gap at $12.58. Perhaps that's what is missing for a trip above the $14.72 high.

I read this thread again and searched for more information on the stock, since I'm down 12.1% on this trade. Whenever I start losing more than 10% I start feeling I should take the loss and move on. But here I need to consider my short term timing was awful. The stock hasn't been deteriorating all that much, I was already down 8% the day after I recommended SYX.

I confirmed the fundamentals and the story, and everything seems fine. I guess that when SYX reports Q3 results it will jump if nothing new happens. People are discounting the reporting delays are due to some negative issue hidden below the carpet. But nobody knows for sure (just the corporate insiders, I guess).

In fact, now that I mention insiders, I see they were exercising options to buy shares around $15 last October, which is a positive ingredient.

Well, we've been waiting for the gap to be closed (since it wasn't a breakaway gap), it is closed now, let's expect the stock to rebound from current levels.

I'll continue holding SYX.

[thai626]

HI David,

I agree 100%.  I think the gap needed to be closed before we can make some money.  That's totally fine with me.   

Money will be made and it'll be during this week.  Like my profile pics says.........show me the money!   

Thai

[David Randolph]

HI David,

I agree 100%.  I think the gap needed to be closed before we can make some money.  That's totally fine with me.   

Money will be made and it'll be during this week.  Like my profile pics says.........show me the money!   

Thai

I'm glad we agree on SYX Thai

After closing the gap, the bids kicked in today and I let out a sigh of relief. It was technically important to get a bullish reaction from this critical short term point.

I'm starting to think SYX came down obviously to close the gap, but perhaps also because all retailers went down some after Black Friday. Now they seem to be coming back, and SYX will probably recover all the lost ground and more.

Losing exactly 10% on this trade now, due to bad short term timing. But the technicals are still constructive and fundamentals are supportive. So I won't use anything like an automatic stop loss, I moved away from that tactic. Any trader knows how to set a stop loss rule, but a wise trader knows when to take a loss.