AWSJ:Heard In Tokyo:Furukawa Rides Wave Of Optical-Fiber Mkt
By Peter Landers
Staff Reporter
TOKYO -- Few companies sound more Old Economy than Furukawa Electric Co.
Founded in 1896, its biggest source of revenue is wires and cables. It also
makes aluminum cans. The company's name means "old river."
Yet many analysts see a new river of profits, and a rising stock price,
flowing from a hot product line at Furukawa that barely existed a few years
ago. Furukawa is a top maker of devices that enable optical fiber lines to
carry more data -- a crucial market, because telecommunications companies
are counting on fiber to transmit data-heavy applications like video and
high-quality audio in the Internet era.
"The key is that they've got a grip on the core parts," says Teruo Isozaki,
an analyst at Nikko Salomon Smith Barney in Tokyo. "They have great
technology." Nikko Salomon Smith Barney has a "buy" rating on Furukawa,
though it warns the stock is high-risk.
Besides its own booming business, Furukawa holds a 16% stake in North
American stock-market darling JDS Uniphase Corp., a maker of optical-fiber
gear that has expanded rapidly through acquisitions. JDS Uniphase recently
announced it plans to buy rival SDL Inc. for about $40 billion. Furukawa's
stake in JDS Uniphase was valued at $14.5 billion as of Friday. Monday,
Furukawa shares fell to 2,985 yen ($27.23), down 15 yen.
Furukawa's ace product is known as a 1,480-nanometer pump laser. The pump
pushes light carrying digital data down a tiny strand of glass known as an
optical fiber. These days the pumps divide the light into hundreds of
colors, so they can send more data at once. Furukawa says it has a 70% share
of the world market for 1,480-nanometer pump lasers.
Its big customers include JDS Uniphase and Lucent Technologies Inc.,
although those two companies are also competitors in other devices,
according to a Furukawa spokesman.
Analysts forecast a surge in demand for optical gear as Internet users
increasingly send and receive huge amounts of data. Conny Jamieson, an
analyst at UBS Warburg in Tokyo, predicts that Furukawa's group revenue from
wave division multiplexing equipment -- a category that includes the pump
laser -- will more than triple to 101.2 billion yen in the year ending March
31, 2001. Ms. Jamieson has a "strong buy" rating on Furukawa's shares.
Many foreign investors agree: As of March 31, 2000, foreigners hold 37% of
Furukawa's shares, up from 5.2% five years ago.
What are the risks in buying Furukawa shares? One would be a sudden plunge
in JDS Uniphase shares. Back in 1990, Furukawa's Canadian affiliate took a
50% stake in what was then an unknown Canadian fiber-optic company called
JDS Fitel. Today, Furukawa's stake in JDS Uniphase is by far its most
valuable asset, and the two companies' share prices have largely risen in
tandem.
Investors have welcomed JDS Uniphase's inclusion in the Standard & Poor's
500-stock index, as well as its proposed merger with SDL. However, JDS
Uniphase's market capitalization of about $90 billion looks high because the
company's revenue in the year ended June 30, 2000, was $1.43 billion.
Competition is another worry, especially since Furukawa's biggest customers
make similar products. Furukawa's longtime rivals in Japan, such as Sumitomo
Electric Industries Ltd., are also moving into the optical business.
As it jumps on the New Economy bandwagon, Furukawa has some Old Economy
baggage to throw off. Mr. Isozaki of Nikko Salomon Smith Barney says some of
Furukawa's traditional cable and wire businesses are unprofitable. "The
question is what they're going to do about the red ink," he says.
A bigger long-term risk is an unforeseen shift in technology. Morgan
Stanley Dean Witter analyst Toru Nagai says the "wave division" method of
dividing light into many colors could eventually be replaced by some other
approach for sending data via optical fibers. "It would take an optimist to
expect the level of growth for any one technology to continue upwards and
onwards over the long term," Mr. Nagai writes in a recent report.
Nonetheless, he has an "outperform" rating on Furukawa's shares.
(END) DOW JONES NEWS 07-31-00
04:33 PM |
