We downgrade our recommendation on Brightpoint Inc. (CELL) to Neutral based on its current valuation, which moved up by nearly 42% last year. The company reported strong financial results in the second quarter of 2011, beating the Zacks Consensus Estimates. We believe the long-term business prospect of Brightpoint remains intriguing buoyed by the galloping demand for high-end smartphones and tablets throughout the world. Newly won distribution agreements coupled with effective cost control strategies will pave the way for the company’s future earnings growth. Management reaffirmed a rosy picture for the rest of 2011.
During the second quarter of 2011, Brightpoint managed 26.93 million wireless devises, up 21% year over year. Management predicted that for fiscal 2011, the company will supply wireless devices within the range of 111 million – 114 million, up 12% – 15% year over year. This outstanding performance was primarily attributable to a massive growth of the Distribution business supported by increasing demand for smartphones and tablets, which have higher average selling price and an improvement in supply-chain management system.
On the other side, if the proposed merger between AT&T (T) and T-Mobile USA get regulatory approval, the future financials of Brightpoint may be significantly affected. T-Mobile USA is one of the largest logistic customers of Brightpoint generating around 20% of total logistic revenue, of the company. Logistic services generate only 9%-10% of Brightpoint’s total revenue but these services command 49%-50% of gross margin. Though Distribution service generates a massive 90%-91% of total revenue, logs a gross margin of just 4%-5%. Furthermore, recent debt crisis in the U.S. and Europe may delay the economic recovery process, which in turn, will affect Brightpoint.