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.

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.