MRVC price target raised to $304! This from MRVC thread via Raging Bull
MRVC: Increasing Price Target to $304; Strong Buy
FIRST SECURITY VAN KASPER CHET WHITE (310) 443-3406 CWHITE@FSCNET.COM
RESEARCH REPORT NETWORKING/COMMUNICATIONS
FEBRUARY 23, 2000
MRV COMMUNICATIONS, INC.
(MRVC - $102 5/16)
Increasing Price Target to $304; Strong Buy
EPS REVENUES (MM)
Fiscal Year: 99/98 00/99 00/99
December 1998A 1999A Change 2000E Change 1999A 2000E Change
Q1 $0.25 $(0.03) NM ($0.01) NM Q1 $70.1 $73.0 14%
Q2 $0.30 $0.02 NM $0.06 NM Q2 $73.3 $85.3 16%
Q3 $0.05 $0.02 NM $0.09 NM Q3 $71.3 $87.9 23%
Q4 $(0.09) $0.02 NM $0.14 NM Q4 $73.9 $95.1 29%
Year $0.53 $0.03 NM $0.28 NM Year $288.5 $341.4 21%
P/E 193x NM 365x Mkt Cap/Revs 10.9x 9.3x
52-Week Range: $104 1/4-5 7/8 Rating: Strong Buy
Market Cap. (MM): $3,151 Price Target: $304
Shares Out. (MM): 30.786 Book Value/Share: $5.42
Estimated Float (MM): 21.85 Current Year ROE: 1%
Est. Insider Holdings: 18% Debt to Total Cap. (12/99): 29%
Est. Institutional Holdings: 22% Gross Margin (FY99): 36%
10-Day Average Volume: 1,020,000 Next EPS Report: April
MRV Communications, Inc. is a world class leader in the rapidly expanding area
of optical network components and systems. MRV designs, manufactures, and
markets leading edge high speed network switching, routing, remote access, and
fiber optic transmission systems for data, telecommunications and cable TV
networks.
We reiterate our Strong Buy rating on MRV Communications, Inc. and are raising
our 12- to 18-month price target to $304 from $166 per share.
Reasons for Increase in Valuation
£ In line with comparable valuations of public fiber optic component and
networking companies, we have adjusted the PSR multiple to 66x and 4x FY00
revenue, respectively.
£ MRV announced its acquisition of a passive fiber optic component manufacturer,
Fiber Optic Communications. This acquisition more than doubles MRV's capacity,
broadens its offering and lowers its manufacturing costs.
£ MRV continues to execute its Internet infrastructure incubator model: it
announced its exit from the Enterprise LAN market, acquisition of 5 new
companies (bringing the total to 14) and the addition of more premier investment
partners including Goldman Sachs and GE Capital.
Quarterly Commentary
MRV reported pro forma Q4 EPS of $0.02, in-line with our estimate of $0.02. As
expected, the company also reported lower year-over-year revenues from its
networking division of $55.6 million versus $60.5. MRV's optical components
division, Optical Access, continued its strong growth pattern, reporting revenue
of $18.4 million, up 27%+ year-over-year. The company noted that it is exiting
the Enterprise LAN business, allowing it to increase its focus on the service
provider Internet infrastructure market.
Since its commoditization in the summer of 1998, the Enterprise LAN business had
become increasingly less important to the company and represented approximately
$65 million in revenue in 1999. We expect the company to exit the business for
the most part by the end of the first quarter of 2000. We also expect the
strength in MRV's other data networking lines, including the fiber Driver,
Opti-switch and network management solutions to compensate for the revenue loss
beyond Q1. Therefore, we are only slightly decreasing our data networking FY00
revenue from $258 million to $248 million. We are also increasing our FY00 EPS
slightly from $0.26 to $0.28, reflecting a higher gross margin due to the
elimination of low margin Enterprise business and higher margin optical
components and networking products (Red-C solution, Linux switch router, Zuma
enterprise switch router, Opti-switch family).
The Fiber Optics Components "FOCI" Acquisition
MRV announced a key strategic acquisition of FOCI for $50 million and 2.4
million shares of stock. The transaction is expected to close in April, pending
regulatory approval. FOCI reported revenue run-rate of approximately $20 million
in 1999 and is estimated to achieve revenues of $27 million and $38 million in
2000 and 2001, respectively. Applying the February 18 $90 closing price, we
arrive at a total purchase price of $263 million or 13x sales. We believe that
the acquisition has several strategic positive benefits including:
£ Increasing MRV's capacity from 72,000 square feet to 222,000 square feet.
£ Adding capacity in the tightest segment of the market-the passive components
segment.
£ Broadening MRV's competitive arsenal to encompass both passive and active
components, making it one of the few companies with depth in both areas;
£ Adding valuable engineering expertise. FOCI has 360 employees with more than
85 engineers;
£ Lowering cost of manufacturing with lower cost labor in Taiwan and China;
£ Opening up massive opportunities throughout Asia.
Given the many benefits, and an asking price of 13x sales versus the industry
average of 66x sales, we believe that the FOCI acquisition offers significant
upside to MRV and its investors. If we add FOCI's revenue to our valuation
model, at 66x FY00 estimated sales of $27 million, we would add $54 to our $304
target price.
Status of MRV's Subsidiaries
This quarter, MRVC solidified its commitment to the Internet infrastructure
incubator model, noting that it has exited the Enterprise LAN market and now has
14 optical components, optical networking and various Internet infrastructure
companies under its umbrella. The status of the most mature of these companies
is as follows:
Nbase/Xyplex Division:
£ Exited the Enterprise LAN business.
£ The company's Red-C subscriber management solution is in field trials with two
service providers and has received initial orders from a CLEC.
£ Opti-Switch Family: MRV continues to have strong results with its new line of
Opti-Switches and Fiber Drivers, reporting wins such as the Caspian Sea project.
We expect the company to announce a new Opti-switch router in the next several
months.
Optical Access Subsidiary:
£ Announced Acquisition of FOCI. Once the acquisition closes in April, MRV
should be in a strong position to file an IPO 2Q00.
£ Increased the capacity of its Chatsworth fiber optics fabrication facility
from 17,000 sq. feet to 68,000 sq. feet.
£ Announced new components including optical passive multimode extender, WDM4-FC
for fibre channel using Coarse WDM.
£ Formed OPTICAL ACCESS ASIA, a Joint Venture with Korea Microwave Technologies.
Charlotte's Web Networks Subsidiary:
£ MRV's Charlotte's Web subsidiary is currently selecting a combination beta
site and strategic investor. We expect commercial availability in 4Q00.
£ The Aranea is expected to be fully equipped by April with all of the necessary
features and interfaces, including MPLS. We believe that the multi-service IP
and TDM solution will be a powerful differentiator.
£ A Charlotte's Web IPO is possible in 1Q01.
Hyperchannel Subsidiary:
£ Received $424 million in second round financing from Goldman Sachs and GE
Capital. We expect Hyperchannel to use these proceeds to ramp this quarter and
prepare for an IPO late spring or summer.
New Access Subsidiary:
£ Since receiving funding from Juniper Networks, Inc. and Kleiner Perkins
Caufield and Byers this fall, New Access has accelerated its commercialization
and we expect beta announcements in Q2 and shipments as early as Q3. Management
estimates that New Access's fiber optic networking solution will deliver a
multi-layer 1-4 solution with WDM, positioining them ahead of single layer
solutions. A New Access IPO is possible in 4Q00.
Zuma Subsidiary:
£ Zuma is currently in alpha with an enterprise switch router that has the
potential to offer more power, survivability and scalability than those of its
peer, Extreme Networks. Zuma's Z16 "supercomputer" is expected to beta this
quarter and ship by 2Q00. A Zuma IPO is possible in 3Q00.
Valuation
Based on increased peer group valuations, upside from the FOCI acquisition, and
progress on MRV's Internet infrastructure strategy, we are raising our 12- to
18-month price target to $304 from $166 (291%+) per share.
Reasons for Increase in Valuation
£ In line with comparable valuations of public fiber optic component and
networking companies, we have adjusted the PSR multiple to 66x and 4x FY00
revenue, respectively. (Refer to valuation Table III)
£ MRV announced its acquisition of a passive fiber optic component manufacturer,
Fiber Optic Communications. This acquisition more than doubles MRV'scapacity,
broadens its offering and lowers its manufacturing costs. If we add FOCI's
revenue to our valuation model, at 66x FY00 estimated sales of $27 million, we
would add $54 to our $304 target price.
£ MRV continues to execute its Internet infrastructure incubator model: it
announced its exit from the Enterprise LAN market, the acquisition of 5 new
companies (bringing the total to 14) and the addition of more premier investment
partners including Goldman Sachs and GE Capital. We believe that as investors
begin to view MRV as a true incubator, an additional value will be placed on the
shares of the parent company.
Valuation Table
We have updated our valuation table to reflect the changes mentioned above. We
have not included any upside from the FOCI acquisition or the recently announced
five subsidiaries.
Source: company reports and FSVK estimates
We reiterate our Strong Buy rating on MRV Communications, Inc. and are raising
our 12- to 18-month price target to $304 from $166 per share.
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