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Globalize This!
By Michael Brush
January 05, 2006
Globalization is great if you like to buy -- or sell -- cheap goods.
But it is tough on managers at companies that make goods at plants around
the globe.
They have to synchronize the flow of everything from raw materials and
components, to finished goods. And they have to forecast demand accurately
or know how to respond quickly – so they always have enough goods on hand
without getting bogged down in margin-killing inventory.
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That’s one reason the shares of “supply chain management” consulting
companies caught fire in the late 1990s just as globalization hit its
stride. But like the stocks riding many of the investment crazes of that
era, supply chain management shares crashed and burned, leaving a few
struggling survivors.
One of them is i2 Technologies (ITWO),
a $15 stock which -- believe it or not -- once traded for more than $2,500 a
share back in bubble days of 2000, adjusting for splits.
Unfortunately, the company took investors on the proverbial roller coaster
ride yet once again last year. A series of troubles and mishaps spooked
shareholders – from missed earnings and life-threatening debt levels, to a
management overhaul and a forced exit from a stock exchange (since
reversed).
Throughout the turmoil, insiders who believed the market was missing i2’s
potential must have been champing at the bit to buy shares. Because when
they finally got the chance in November as company rules allowed them to
purchase, they did so in a big way. Several top insiders bought over $1
million worth of stock at the end of November, according to Thomson
Financial.
That’s some kind of conviction. I think it’s a cue you will see decent gains
over the course of a year or two if you follow their signal.
New leadership
In short, this is a company on the rebound that has burned investors in the
past. So they’re passing up on the stock. But they’ll likely regret it a
year from now since the company is now in competent hands, and it’s in the
midst of a promising turnaround.
Since last March, i2 has been lead by Michael McGrath, who comes from a
successful consulting company in supply chain management called PRTM, which
McGrath he founded in the 1970s. His record shows he has a kind of Midas
touch in this field. He’s now putting it to work in a turnaround that has
many of the usual components.
Cost cutting and debt restructuring
First off, McGrath has cut costs by doing things like adjusting the size of
the work force, cutting back on excessive billing for travel to visit
clients in the flirtation phase, and even reducing the widespread use of
corporate cell phones. McGrath has also cleaned up i2’s finances and
restructured its debt. That’s brought down interest costs. But it’s also
cleared concerns from the minds of potential clients who had worried that i2
might not be around in a year or two to keep its promises.
Revenue growth
All of this is good, but it won’t mean much without a solid kick to revenue
growth. McGrath estimates the supply chain sector is growing at about 5% a
year, a decent start. But he figures i2 will be able to grow much faster
than that by taking share -- in part by moving into new sectors like
pharmaceuticals, life sciences, government and defense.
“Even though we are largest in the marketplace, we still only have 8% of the
market,” says McGrath. “It is very fragmented, and it does not need to be.”
McGrath sees potential in retail. Right now, Dell (DELL)
uses i2 software to reschedule its factories every two hours. “They get new
orders and have to determine where to make them and what material they will
need to make them and where it is most cost effective to do this.” Big
consumer electronics retailers like Best Buy (BBY)
would love to have the same power, and McGrath believes i2 can provide it.
The company also has a new product line called Forecast Optimization which
front-loads a consulting component. Theoretically, clients will see swift
results in this phase, which will entice them into buying software in
longer-term commitments.
The bottom line: JMP Securities analyst Patrick Walravens has a price
target of $25 on i2, which would bring 65% gains for anyone who buys here.
We may not see $25 in twelve months. But given the turnaround and the way
insiders snapped up shares the first chance they got – at around $13.75 or
near recent trading levels – this stock seems like a decent bet right here.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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