Good AM Tim and ALL CS MUST read
Stock of the Day
Jan 04, 2000
Cabletron Systems: A Switch in Time?
Senior Analyst: Adam Lowensteiner (1/4/00)
Has Cabletron Systems (NYSE:CS - news) finally gotten its act together?
Investors seem to think so.
Since bottoming in the spring at $7.19, its shares have more than tripled, closing Monday at $26.69.
Their faith seemed to be justified when the supplier of networking and communications products reported earnings for its fiscal 2000 third quarter, ended November 30. The company earned $0.12 a share, or 20% above analyst estimates of $0.10 a share. Cabletron?s bottom line was 71% better than the $0.07 a share it earned in the same quarter a year ago.
Sales increased 13% to $372 million in the quarter, slightly beating analyst estimates. Cabletron also boosted margins.
This is the first time the company made money since 1997. In fact, it had to restate its results going back several years after it sold money-losing businesses in the cable and telecom hardware industries.
The most recent divestiture: Cabletron shed FlowPoint to Efficient Networks (NASDAQ:EFNT - news) for about $1 billion in stock.
Instead, the company chose to focus on its Spectrum networking software, by establishing a separate subsidiary called Aprisma Management Technologies.
In addition, it is mostly concentrating on its routers and switches for networking purposes.
These days, Cabletron is in the red-hot business of making networking hardware and software, including routers and switches. The company is witnessing solid sell-through from its switches and routers around the world, but it also plans to benefit from its Spectrum line of networking software, which supports e-commerce and e-business applications.
These moves finally appear to be paying off. Besides reporting a profit, Cabletron?s gross margin grew 800 basis points to 46.4% in the third quarter. Operating expenses also fell as a percentage of sales, with research and development falling over 300 basis points and general and administrative expenses dropping over 700 basis points. Improvements like these also caught analysts flat-footed.
Despite the recent runup, analysts still think the stock is attractive.
Cabletron has a pristine balance sheet, with no debt, $6 in book value and nearly $2 per share in cash, which translates into a war chest of over $350 million. It also owns 13.5 million shares in Efficient Networks' stock.
It is also trading at three times sales and roughly 35 times consensus fiscal 2001 earnings estimates of $0.70 per share. Given that Cisco, the industry?s biggest hotshot is trading for 27 times sales, it would not be a stretch to argue that Cabletron could trade at a price-to-sales ratio of six. If so, that would enable the shares to double from present levels.
There?s another factor that could drive the shares higher: Cabletron could be a takeover target for a larger networking company, since it only sports a market capitalization of nearly $5 billion.
Bottom Line:
Cabletron?s shares could hit $50 within 12 to 15 months, although there could be some quarterly bumps in the road given Cabletron's turnaround situation.
-------------------------------------------------------------------------------- |
