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Nu Horizons – Follow the Herd
I am at a complete loss to explain the markets reaction to Nu Horizons’s (NUHC) most recent quarterly results. People appear content to follow the herd for now, but the problem with being surrounded by warm bodies is it makes a quick escape impossible.
Nine months ago the company all but guaranteed 4% operating margins by the quarter ending February ’07, which they reported yesterday. Operating margins were at 3.3% last fall when they made this statement. They have declined steadily since then and currently are at 1.2%.
Everything was awful about their quarter.
- Revenue down 9% Q/Q
- Opex Up 2.2% Q/Q
- Gross Margins Flat. No quantitative sign of additional margin from their much vaunted registration business.
- Operating margins declined from 3.2% six months ago to 2.7% to 1.2% in the last quarter.
- SEC subpoenas documents about their #2 supplier, Vitesse Semiconductor (VTSS.pk). Nu Horizons did nothing wrong, but it certainly calls into question the activities of their customers, activities that I feel are highly profitable (See “Trickle Down Economics and Channel Stuffing“), an activity that I feel is on the wane.
- Sun Microsystems (#3 supplier) brazenly announces they will undercut distributor pricing. People have totally missed this. (see Barrons – no subscription required)
- DSO’s on Receivables drop 3rd quarter straight and Payable turns drop 25%. Both are at 3 year lows.
- Net Inventory purchases down for 4th straight quarter. This has been a decent leading indicator of future earnings as NUHC stocks up supplier inventory and recognizes superior margins associated with stuffing activity.
Distributor equities such as Avnet (AVT) and Arrow (ARW) have done exceptionally well in the past six months. I believe Nu Horizons is being lifted by misplaced positive sentiment associated with these companies.
I fail to understand the long term attraction of these businesses in a global environment that is universally eliminating all high cost middlemen. Why should components, the ultimate commodity, be any different? This should be especially true in the technology industry, the sector catalyzing these global changes in the first place.
Author holds and controls short Nu Horizons and long Vitesse positions.
FPGAs tend to favor distributors because Xilinx, Altera, Lattice don’t want to support small customers with designs, FPGA designs can require significant support and the markups can be high. You don’t have to sell very many LX330Ts to make a lot of money.