the rest of the story....:
We reiterate our Strong Buy rating on MRV Communications, Inc. and are raising our 12- to 18-month price target to $166 from $40 per share (for appreciation of 291% above current market price).
Reasons for Increase in Valuation:
ú Since our initial report in July of 1999, comparable valuations of both public and private peers have increased twofold to fivefold.
ú MRV Communications continues to add the necessary partners, management and staff securing sellthrough of its subsidiaries high-end products.
ú MRV Communications is making significant progress towards executing its monetization strategy.
ú The company's NBase-Xyplex and Optical Access base businesses are performing well and have several exciting new products including the Red Sea SMS, Linux Switch Router, Zuma Switch Router, Optiswitch Gigabit Ethernet Switch, and a complete family of Fiber Channel transceiver modules.
Valuation:
Based on increased peer group valuations, increased probability of product commercialization, progress on monetization strategy and exciting core business prospects, we are raising our 12- to 18-month price target from $40 to $166 (+291%) per share.
Reasons for Increase in Valuation:
ú Since our innitiation report in July of 1999, comparable valuations of both public and private peers have increased twofold to fivefold.
Public Market Valuations: The industry mean price sales ratio (PSR) of fiber optic components has increased fivefold, from 8x to 41x. The industry mean PSR of networking has increased threefold from 49x to 148x.
Private Market Valuations: We had originally benchmarked the private market valuations using the prices paid for acquisitions of early stage firms such as Tellab's $550 million purchase of Nexabit and Lucent's $900 million purchase of Nexabit Networks. The price paid in recent private transactions has increased fivefold as seen in Redback's $4.3 billion bid for Siara and Nortel Networks $2.8 billion bid for Qtera.
ú Over the past quarter, MRV Communications has continued to add the necessary partners, management, and staff securing sellthrough of its subsidiaries high-end products. Most notably, MRV Communication's subsidiary New Access - fiber optic networking firm, has added some of the top talent in the field.
- Anthony Lavia, Ph.D., President and CEO - from Newbridge, Nortel and Bell Canada.
- Paul Yazge - V.P., Worldwide Sales - from Ciena, Stratacom and Hughes Network Systems.
- Asif Iqbal, Ph.D. - V.P., Engineering - from FORE, Sun Microsystems, IBM and NCR.
- Paz Gilboa - V.P. , Telecom Products - from ECI Telecom.
- Rob Keil - V.P., Marketing - from Cisco Systems.
- Pradeep Sindhu - Board Member - Founder and Chief Technical Officer, Juniper Networks
- William R. Hearst III - Board Member - Founder of @Home and Partner, Kleiner Perkins Caufield & Byers.
We believe MRV Communication's pureplay strategy should give it the ability to replicate comparable talent at its other subsidiaries. This can already be seen at MRV Communication's B-to-B subsidiary, Hyperchannel, which has executives from Cisco, AltaVista, IBM, and 3Com.
ú MRV Communications is making significant progress towards executing its monetization strategy. New Access recently closed its second round of financing, and we believe that both Charlottes Web and Hyperchannel will close their second round financing near-term. Management also notes that it is making significant progress on the recruitment of a CEO for Optical Access.
ú The company's NBase-Xyplex and Optical Access base businesses are performing well and have several exciting new products including the Red Sea SMS, Linux Switch Router, Zuma Switch Router, Optiswitch Gigabit Ethernet Switch, and a complete family of Fiber Channel transceiver modules. Management noted they are very comfortable with our estimates.
Valuation Table
We have updated our valuation table to reflect the changes mentioned above. We maintain our PSR of the core networking company - NBase-Xyplex - at 2.8x, which is inline with the slow growth networking category in table III. We have made a significant adjustment in the PSR of the fiber optic component business - Optical Access, from 3x to 41.6x, inline with other optical component firms listed on table III. Based on the progress of the other subsidiaries/investments, we have now included their values in our price target. We assume that Optical Access and Zuma should give away 5% of its shares to new management. Additionally, we have increased the valuation of Zuma, New Access, Charlottes Web, and Hyperchannel. We applied a benchmark of $2 billion valuation figure and discounted this value for ownership (95% and 65%), IPO/acquisition premium (35%) and degree of commercialization risk (35%).
Rev. Est. Est.
Y2000 P/S Own. Disc Pr./Shr.
1. NBase-Xyplex - LAN, WAN and Remote Access $259 2.8x 100% $ 21
2. Optical Access - Fiber Optic Components $92 41.6x 95% $ 81
3. Zuma - Layer 2-7 Switch Router 95% 35% $ 27
4. New Access - Optical Networking 45% 35% $ 13
5. Charlottes Web - Terabit Router 45% 35% $ 13
6. Hyperchannel - B to B 45% 35% $ 13
Total Value $166
Source: Company Reports and FSVK estimates
The net result dictates a 12- to 18-month price target of $166 (+291% above current market price). To add further perspective to this new price target, it equates to a market capitalization of $5.2 billion. We feel this is very realistic given the potential of each of the five pureplays and the core networking company, Nbase-Xyplex as compared to the $2 billion to $18 billion market capitalization of the MRV Communication's "next generation" peers.
In our opinion, there is still significant upside from our price target. Upside could be added as each of these subsidiaries builds out its infrastructure and potentially gets spun off. Additionally, the company recently announced it is starting a new subsidiary, All Optical, which is to be lead by Professor Baruch Fischer, Dean of Electrical Engineering from the Technion. We also believe MRV Communication's Linux switch router offers investors major additional upside potential considering the huge valuations placed on other "Linux" based companies such as VA Linux Systems (LNUX) and Red Hat (RHAT). We must also caution investors of the high degree of risk associated with early stage businesses and the extraordinary valuations being applied to companies in the "internet infrastructure" space. With that said, we believe that MRV Communications represents one of the most unique opportunities for investors today. We reiterate our Strong Buy rating and raise our price target to $166 from $40 (+291%).
Other Public Companies mentioned in this report include:
Cisco Systems, Inc. (NASD: CSCO $99 13/16, Note Rated) Lucent Technologies (NYSE: LU $80 «, Not Rated)
Red Hat (NASD: RHAT $273, Not Rated) Tellabs, Inc. (NASD: $62 7/16, Note Rated)
VA Linux Systems (NASD: LNUX $218, Note Rated)
First Security Van Kasper makes a market in the shares of MRV Communications, Inc. Additional information is available upon request.
Investments made through First Security Van Kasper: (1) are not insured by the FDIC; (2) are not deposits or other obligations of, or guaranteed by FSVK, First Security Bank or any of its affiliates; (3) are not guaranteed by any Federal governmental agency (excluding U.S. Government and federal agency securities); (4) and are subject to investment risks, including possible loss of principal amount invested. |
