5/19/98 Jubak's Journal. My "best bet" telecom portfolio [includes ASND]
investor.msn.com
I use five industry trends as a foundation for
standout telecom picks . . . like WorldCom,
Cisco, Texas Instruments, Qualcomm and
Vitesse.
By Jim Jubak
Consider this Step 2.
A while back, in my column "Goodbye to PC
Stocks," I argued that investors who now
wanted to reap returns like those that
investors earned from the PC revolution of the
1980s should invest in telecommunications
stocks. I said that with unit growth in PC
sales running in the 15% to 20% range,
stocks like Intel (INTC), Microsoft (MSFT) and
Compaq (CPQ) certainly aren't going to be
bad investments going forward. But since
Internet traffic was growing at 1,000% a year,
returns from investing in companies that were
building the new communications network and
selling the new products and services that
such a network made possible were likely to
be quite substantially higher.
In that column I suggested some stocks for a
telecommunications portfolio -- I had
previously added two, Advanced Fiber
Communications (AFCI) and Tellabs (TLAB),
to Jubak's Picks -- and promised to come
back with a full telecommunications portfolio.
Well, here's my stab at that portfolio.
I've tried to break down the
telecommunications revolution into a few
important trends and sectors and then to find
a stock -- what I call a Best Bet -- that should
profit from that trend. I've also tried to suggest
a few alternatives to my Best Bet in each
area, for investors who either want to load up
in a sector or who want to do further research
on their own. I expect disagreement. In fact I
look forward to it. My study of
telecommunications stocks is still in its early
stages. I'm sharing my conclusions with you
in the hope that, over the months to come, we
can refine and improve this portfolio together.
I've come up with five major investment
themes:
Data, not voice
End to end
The age of DSP
Wireless everywhere
Piece by piece
Data, not voice. The argument is pretty
simple. The voice-dominated
telecommunications network that we now
have is changing into a data-dominated
network. The assets and skills of the
companies that built and control the
voice-dominated network are becoming less
valuable; the assets and skills of the
companies specializing in data are increasing
in value.
Details
Company Facts
1-yr Chart
* Earnings Estimates
Company Facts
1-yr Chart
* Earnings Estimates
A few numbers, please. Last year, it looked
like traffic on the Internet, which I'll use as my
proxy for data traffic, was set to continue
doubling every 3.6 months -- that's about
1,000% a year. Turns out this
almost-unbelievable growth rate may actually
be accelerating. The most recent numbers
from a study done by the Commerce
Committee of the U.S. House of
Representatives showed 1,200% annual
growth.
In contrast, voice traffic is growing by about
10% a year. So by 2000, data on the Internet
will account for about half of the world's
telecom bandwidth. By 2005, it will make up
more than 90% of the total if the current
growth rates continue.
So forget about the regional Bell companies --
even if they succeed in becoming
super-regionals -- as well as any other phone
company with a business currently dominated
by voice. They've just got too many dollars
sunk into the old voice network infrastructure.
That investment will earn lower returns going
forward and these companies will spend too
much time defending their shares of the voice
market in order to stretch out the useful lives
of these assets.
Instead, look for companies that own
networks optimized for data. Best bet:
WorldCom (WCOM). No matter what happens
in the Justice Department's review of the MCI
deal, thanks to its UUNet division, WorldCom
is already the dominant Internet backbone
company. The exact terms that the Justice
Department imposes on the WorldCom/MCI
merger will determine whether being No. 2 is
simply daunting or outright impossible.
WorldCom Internet revenue grew by 100%
year-to-year in the first quarter of 1998.
Alternative choice here: Qwest (QWST). The
company combines a state-of-the-art fiber
system with -- as a result of the LCI
International merger -- an aggressive sales
force. But Qwest is just now making the
transition from a company that owns pipelines
to a company that sells to customers.
Details
Company Facts
1-yr Chart
* Earnings Estimates
End to end. No company yet has a lock on
building the new data-dominated network.
Internet-based companies such as Cisco
Systems (CSCO) don't have much experience
in building highly reliable, easily managed,
service-oriented networks. Phone-system
suppliers such as Lucent Technologies (LU)
are still struggling to buy or develop all the
data-network technologies that they need. But
it's clear from the torrid pace of acquisitions
that a rapidly consolidating industry is going
to produce a handful of end-to-end suppliers
that will dominate the future build-out.
Best bet: Neither Cisco nor Lucent owns all
the pieces it needs, and both already offer
enough of an end-to-end solution to squeeze
smaller competitors. But I prefer Cisco, a
Jubak's Pick on Sept. 12, 1997 ("Catching the
Cisco Express"). The company's aggressive
culture is ingrained, not a recent implant, and
it is attacking the big telecom market where
Lucent already owns a substantial share.
Details
Company Facts
1-yr Chart
* Earnings Estimates
The age of DSP. Consider this analogy. The
digital signal processor chip occupies the
same central role in the telecommunications
revolution as the Intel microprocessor did in
the PC revolution. The new network is all
about turning analog signals into digital ones
-- turning voice into digital data and then back
into voice, for example. You'll find digital
signal processors in wireless phones, VCRs,
camcorders, and modems -- anywhere, in
fact, that the analog world of sound and light
and touch has to be converted to digital form.
Now, no company has the kind of 85% market
dominance that Intel has achieved in
microprocessors and I don't think it's likely
that any one company will. The DSP business
isn't about turning out volumes of basically
identical chips, but instead about adapting a
best-of-its-class chip to a specific product and
use. But this market is growing at about 40%
a year -- at least twice as fast as the PC chip
business.
Best bet: Texas Instruments (TXN), a Jubak's
Pick on August 22 ("Itching at the Trigger").
The company owns about 45% of the DSP
market and combines manufacturing skills
(and volume) with the engineering depth to
adapt its chips to new products.
Alternative choice: Analog Devices (ADI), the
third-largest maker of DSPs behind Texas
Instruments and Lucent.
Details
Company Facts
1-yr Chart
* Earnings Estimates
Wireless everywhere. Worldwide wireless
subscribers are projected to number 425
million in 2000, up from 275 million projected
for 1998. Within that time period, we're likely
to see the price of wireless service hit parity
with the price of wired service. When that
happens, ownership of a wireless phone
moves from being mostly the province of the
stressed-out and wealthy to being a
reasonable choice in the general consumer
market. That trend is already visible in both
the developing world -- where getting a land
line is essentially impossible -- and in parts of
the developed world such as Europe.
Best bet: Qualcomm (QCOM), a Jubak's Pick
on January 26, 1998 ("When Opportunity
Knocks Again"). I prefer Qualcomm for its
relatively small size -- just over $2 billion in
annual sales -- and because it gives me a
play across the spectrum of wireless
opportunities, including a stake in the
Globalstar GSTRF satellite system being
launched by a group headed by Loral. The
small sales base means Qualcomm has lots
of room to grow and that margins should
increase as the company is able to spread
fixed costs across larger sales.
Alternative choices: Ericsson (ERICY) and
Nokia (NOK/A). Sweden's Ericsson is a global
power in wireless with solid management, and
it does a far bigger business than Qualcomm
in selling the equipment needed by wireless
operators to set up their networks. Meanwhile,
the ability of Finland's Nokia to figure out and
exploit the hot trends in features and fashion
has helped it grab 50% of the tough European
market.
Details
Company Facts
1-yr Chart
* Earnings Estimates
Company Facts
1-yr Chart
* Earnings Estimates
Company Facts
1-yr Chart
* Earnings Estimates
Piece by piece. Just as the PC industry
depends on scores of companies that build
components, so too the telecommunications
network will be built of dozens of specialized
products from companies that sell to the
Ciscos, Lucents, Ericssons, and Qualcomms.
I have several Best Bets here -- first among
companies that will put speed in the network.
Vitesse (VTSS), a Jubak's pick on June 17,
1997 ("Chip Investors, Roll Up Your Sleeves"),
adds speed by making chips that run faster
than those based on silicon; Uniphase
(UNPH) does it by building components that
cut down the number of times light-based
signals have to be converted to electronics;
and PMC-Sierra (PMCS) designs chips that
speed up the operation of the next generation
of broadband networks.
Other companies will profit from making
smarter switches that add intelligence to the
network. Here, my Best Bets are Ascend
Systems (ASND), a Jubak's Pick on
September 2. 1997, ("Bargains or Blunders?")
and Fore Systems (FORE).
A final group builds products that sit at the
point where the very efficient long-distance
fiber-optic networks connect with the
complicated local loops that take service to
individual homes and offices. My Best Bets
here, both Jubak's Picks on March 17, 1998,
("Picking Up on Telecom Mergers") are the
aforementioned Tellabs and Advanced Fiber
Communications.
Do these stocks exhaust the pool of potential
winners from the telecommunications
revolution? Of course not. I haven't mentioned
companies such as Metromedia Fiber
Networks (MFNX) that are building fiber
networks in urban areas to connect
businesses to the national network, or
international wireless companies, or satellite
systems, or . . . Well, you get the idea.
This revolution has a long way to go before it
runs its course. I'll be writing about other
companies before it's done. You can count on
it.
Best bets
Company
Current
Price
52-Week
High
52-Week
Low
WorldCom
(WCOM)
44 1/16
45 3/8
25 1/4
Cisco
Systems
(CSCO)
77 3/4
76 3/4
40 1/8
Texas
Instruments
(TXN)
59 3/16
71 1/4
39 5/8
Qualcomm
(QCOM)
56 1/16
71 7/8
43 1/4
Vitesse
(VTSS)
50 7/8
59 1/4
31 5/8
Uniphase
(UNPH)
55 1/16
60 3/8
22 5/8
PMC-Sierra
(PMCS)
43 1/4
51 1/4
19 1/2
Ascend
Systems
(ASND)
44 1/4
60
22
Fore Systems
(FORE)
23 1/4
24 7/8
13 1/4
Tellabs
(TLAB)
70 9/16
73 3/8
42 3/4
Advanced
Fiber Comm.
(AFCI)
38 11/16
44 3/4
21 1/2
Runners up/alternative choices
Company
Current
Price
52-Week
High
52-Week
Low
Qwest
(QWST)
39 3/8
41 1/16
13 1/8
Lucent (LU)
71 9/16
79
30 3/8
Ericsson
(ERICY)
52 3/8
56 5/8
33 7/8
Nokia (NOK/A)
63 7/8
70
31 5/8
Analog
Devices (ADI)
33 13/16
39.620
23 3/4 |
