We are downgrading our recommendation on Brightpoint Inc. (CELL) to Neutral following the recent consolidation trend in the U.S telecom industry.
The recent announcement of AT&T (T) to acquire T-Mobile USA for $39 billion is a major setback for the company. If the deal gets regulatory approvals, then the company’s future financials may be seriously affected.
Logistic services are a high-margin business for Brightpoint. T-Mobile USA is one of the largest logistic customers of the company, generating around 20% of its total logistic revenue. Logistic services generate only 9%-10% of Brightpoint’s total revenue but these services command 49%-50% of gross margin. Whereas, Distribution service, which generates a massive 90%-91% of total revenue, logs a gross margin of just 4%-5%.
In contrast to T-Mobile, AT&T’s share of Brightpoint’s top-line is very much negligible. AT&T outsourced its activation services to Synchronous Technologies. After the acquisition, AT&T might not continue with Brightpoint, which will significantly reduce both the top-line and bottom-line of the company.
From a financial standpoint, gross margin and operating margin of Brightpoint still remain in the single digit. Under these circumstances, we believe deletion of T-Mobile from the clientele will be a major blow to the company.
Meanwhile, the stock price has declined nearly 25% after this news surfaced. We believe the current valuation of Brightpoint is reflecting these negative factors and may provide a cushion for a further downside. In our view, long-term business fundamentals of Brightpoint remain encouraging primarily due to growing global demand for smartphones. We also believe that the recent acquisition of Touchstone Wireless will be a long-term positive for the company.
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