Interesting story... ATI is mentionned...
Saturday, December 11, 1999
Nortel not the only game in town
Reasonably priced alternatives available in high-tech sector
Sonita Horvitch
Financial Post
Although the stock of star performer Nortel Networks Corp. could continue to advance in 2000, there are more reasonably priced alternatives in the high-tech field, says Robert McWhirter, vice-president and portfolio manager at Royal Bank Investment Management Inc. in Toronto.
A technology specialist, Mr. McWhirter uses both quantitative and traditional fundamental analysis. His principal focus is to compare relative earnings growth prospects with relative values.
Looking at the performance of Canadian tech stocks, he notes that the Toronto Stock Exchange 300 technology hardware subindex was up 137% for the first 11 months of this year, while the technology software subindex added only 17%. In the same period, the TSE 300 gained 16%.
Can the TSE hardware subindex keep up this pace in 2000? Mr. McWhirter says the answer hinges on the outlook for Nortel's stock, which currently makes up about 71% of the group.
Analysts are calling for Nortel to earn $1 (US) a share for 1999 and $1.25 (US) for 2000, up 25%. This is based on forecasts of $10-billion (US) in fibre-optic equipment sales for 2000. "These sales could be better than anticipated -- in the region of $12-billion to $13-billion (US), which would raise Nortel's EPS to $1.30 or higher and boost the EPS growth rate to 30% or better," he says.
Nortel (NT/TSE), with a recent close of $122.50 and a 52-week trading range of $126.50 to $34, is at a very high multiple relative to its prospective earnings growth rate, says Mr. McWhirter, "which carries some risk, even though the stock might have good upside."
While he still holds a very large position in Nortel, Mr. McWhirter is emphasizing stocks that are trading at more modest multiples relative to their prospective earnings growth rates.
For the column, he has chosen:
- Mitel Corp. (MLT/TSE) $17.70 ($19.70-$7.35). Based in Kanata, Ont., this company makes microelectronic components for the world communications market. Its semiconductor business is doing extremely well and its order backlog has doubled since March. Mitel's book-to-bill ratio, the ratio of orders to shipments, is a very healthy 1.5:1, Mr. McWhirter says.
The company also makes PBX telephony systems, which make up about half its sales. This division "is growing modestly."
Consensus earnings estimates for its fiscal year to March, 2000, are 83½ a share and $1 for fiscal 2001.
- ATI Technologies Inc. (ATY/TSE) $19.15 ($27.90-$13.40). The Thornhill, Ont.-based firm makes computer graphics and multimedia products. In addition to its graphics accelerators, ATI is offering several new products cheaper than its competitors. For example, it is participating in the design of digital cable TV set-top boxes that have $40 (US) less in materials costs than competing products. It is also designing digital video recorders to sell at roughly half the cost of similar products made by TiVo Inc. and Replay Networks Inc., which are both in California.
Consensus earnings forecasts for ATI are $1.23 for the fiscal year to August, 2000, and $1.42 for fiscal 2001.
A micro-cap tech stock he likes is:
- EMJ Data Systems Ltd. (EMJ/TSE) $7.60 ($8.05-$2.70). Based in Guelph, Ont., EMJ distributes computer products including Apple, Unix and digital audio visual products. "Apple is an important product for this company and there has been a dramatic revitalization and resurgence in its high-end offerings."
Furthermore, the sale of its Unix products is going well because of the widespread use of the related Linux operating system, which is challenging Microsoft Corp.'s operating systems.
Consensus earnings estimates are 75½ a share for the fiscal year ended July, 2000, and 90½ for fiscal 2001.
Mr. McWhirter continues to champion electronics manufacturing services company C-Mac Industries Inc. (CMS/TSE) $68 ($69.50-$22.25), a selection in a column in September, when it was trading around $39.50. He also still likes Hummingbird Communications Ltd. (HUM/TSE) $42 ($42.50-$21.35), which makes a line of personal computer to enterprise connectivity products. This was also a pick in September, when the stock was trading around $37.75. "Both stocks appear cheap relative to their peers."
Mr. McWhirter recommends selling Leitch Technology Corp. (LTV/TSE) $17.50 ($40-$15.50), which makes equipment and software for TV broadcasters. He says there has been a delay in the conversion to high-definition television in the U.S., which is debating whether to use North American or European transmission standards. It was to be a key source of revenue for the company.
Royal Bank Investment Management may hold positions in the securities mentioned.
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