IPO Critic: Optical Communication is ready to make waves
redherring.com
By Tom Davey
Redherring.com, October 30, 2000
Timing is everything, especially when you're planning an IPO.
Take Optical Communication Products (Nasdaq: OCPI), which is planning to go public around November 3. This cutting-edge company makes optical gizmos, such as transmitters, receivers, transceivers, and transponders, for networks in metropolitan areas. It's in one of the faster-growth areas of the booming optical networking industry. Jay Liebowitz, director of optical components for the telecommunications market research firm Ryan Hankin Kent, expects this niche to grow by more than 50 percent annually.
But industry bellwether Nortel Networks (NYSE: NT) announced disappointing earnings October 24 with news that its optical networking unit did not live up to expectations. Nortel's optical sales for the September quarter were up a mere 90 percent over the same quarter a year ago. Analysts were shooting for a 125 percent gain. The announcement came on the heels of yet more disappointing industry news from Lucent Technologies (NYSE: LU). Nortel's stock took a pummeling that left the entire optical industry severely bruised. Even Furukawa Electric, a Japanese optical components maker that owns 70 percent of Optical Communication, took a pounding on the Tokyo Stock Exchange.
Well, it's about time. Optical networking companies finally have taken the whipping they deserve for becoming so pricey. It's no different than what happened to the dot-coms last year and genomic companies a few months ago. Although most optical companies still won't appeal to value investors, the market has overreacted and some great buying opportunities are out there.
Rarely have I considered this year's IPO candidates bargains. The carryover of hype from last year has inspired investment bankers to attach deals with insanely high price tags. It's no wonder that so many offerings that have gone out at their proposed prices have bombed. But I'll go out on a limb and predict that despite the present ugly environment for optical stocks, Optical Communication, at its current proposed price, will be one of the year's best first-day performers and will close the year as one of the biggest gainers on the Nasdaq.
THE DEAL
Optical Communication plans to sell 10.5 million shares, or about 10 percent of the company, at $11 a share for a $116 million offering. UBS Warburg is the lead underwriter.
Here's why this will be a sizzler: Stratos Lightwave (Nasdaq: STLW), Optical Communication's most direct publicly held competitor, trades at 22 times trailing 12-month sales, about half of the level it stood at when it went public a few months ago. Contrast this with Optical Communication's proposed offering price, which values the company at a relative bargain of 14 times sales. What's more, while Stratos's year-over-year June quarter sales grew at a respectable 71 percent to $26 million, Optical Communication's sales tripled to $29 million. Luminent, another comparable company that has filed plans to go public but has not yet set a date, would be offered at 23 times sales.
It gets even better. Stratos still trades at a hefty 434 times trailing earnings and Luminent isn't even close to earning money. Meanwhile, Optical Communication plans its public debut at 58 times earnings. The gross margins for Stratos and Luminent are a marginal 33 percent and 27 percent, respectively. Optical Communication's are a hefty 49 percent and rising.
Another comparable company is Finisar (Nasdaq: FNSR). The comparison in this case is not quite as strong because Finisar serves a broader market within the optical space. But Finisar trades at 55 times sales and 1,116 times earnings despite the fact the First Call analyst consensus for the next five years is only 38 percent annual earnings growth.
RISKY BUSINESS
Optical Communication, like any potential high-flyer, has some serious risks. Its ten largest customers account for 80 percent of revenue. Cisco Systems (Nasdaq: CSCO), its biggest customer, accounts for 37 percent. The company also faces a patent lawsuit from Methode Electronics (Nasdaq: METHA), the parent company of Stratos. Although the suit is in its early stages, the patent under question accounts for 29 percent of Optical Communication's revenue.
Despite such risks and the awkward timing of the IPO, I think Optical Communication is priced to take off like a rocket. |
