HLIT.......
SmartMoney: Hot Stuff: Wondering What's In The Cards For The Market's Liveliest
Sectors? Here's The Outlook -- And
Nine Great Investment Ideas
Telecom Equipment
It's inevitable. The moment you upgrade to faster or bigger chips in your PC, along
come new versions of your favorite
programs to bog down your extra processing power and hog your additional memory.
Well, it works that way with
telecommunications bandwidth, too. Increase the capacity of a network and traffic will
somehow materialize to fill the space.
Small wonder that telephone companies keep spending on equipment to increase their
bandwidth capacity. "The
fundamentals have never been better," says James Parmelee, CS First Boston's veteran
telecom-equipment analyst. "We
monitor the capital expenditures of 70 or so service providers, and we haven't seen the
peak in the growth rate yet." That
says a lot because the current growth rate is 30 percent a year. He thinks there's a
good chance it will top 35 percent by
December.
Everybody knows where the money is going: Telecom- equipment companies. That's
why many stocks in the sector have
managed to hold on to gains this year despite the savaging of technology indexes.
Companies including optical-component
maker JDS Uniphase and its competitor SDL both trade well over 100 times 2001
earnings. Juniper Networks, which is
taking some of Cisco's router business, dropped by 30 percent in the past three
months and still trades at a P/E of 479.
As such, this seems to be a good time to investigate some of the lower-profile stocks
that share the same fundamentals. One
small cap worth considering: Harmonic. This Sunnyvale, Calif., firm sells Metro Link, a
high-speed fiber-optic system
specially configured for cable service providers. Harmonic's systems allow cable
companies to get more bandwidth on their
networks so they can deliver interactive services such as Internet access, telephony
and video-on-demand.
Harmonic's share price was cut in half this spring when it fell along with the other small
caps. Investors were irritated that
new acquisition Divicom grew only 3 percent in the first quarter, after Harmonic had
said the business was growing 30
percent a year. Even though Divicom didn't become part of Harmonic until May 3,
HLIT now trades at a P/E of only 31
based on next year's earnings. Jim Jungjohann, CIBC's telecom-equipment analyst,
calls the selloff unwarranted. "Sales are
traditionally weak in the first quarter," Jungjohann says. "Every customer we talk to
tells us Divicom has the industry's best
real-time video-encoding technology." You can't broadcast live video unless you can
convert it instantaneously. |
