Antec gets good press in Barrons 3/27/2000:
Antec is good at communications, lousy at communicating
By Barry Henderson
Although it probably hasn't come to your neighborhood yet, it's a good bet
you'll soon be able to buy local telephone service from your cable company.
Investors have sought to take advantage of this new development by buying
up shares of the cable companies themselves. Another way to play this trend
is to buy shares in companies that make the electronic components that the
cable companies need to carry voice and data transmissions. And despite
some recent missteps, Antec, of Duluth, Georgia, is the largest and
bestpositioned company in this arena.
Antec makes and distributes equipment that turns one-way cable television
systems into two-way systems for telephony. It's best-known cable telephony
product is a "host digital terminal," which routes calls from the cable system's
central office to individual homes.
Antec President Robert Stanzione notes that broadband fiber outfits like
Qwest and Level 3 are spending tens of billions of dollars on long-haul
networks. "But nobody really has that last mile to the home like cable
companies," he says. "The pinch point in the network is that last mile."
Equipment for cable telephony now represents about 30% of Antec's
revenues and has the highest growth rate of any of its product categories.
Indeed, this segment of the business has been the springboard for the
company's expanding revenues and earnings over the past few years.
In 1999, revenues jumped 51%, to $827 million, from $546.8 million the
previous year. Profit was even higher, with operating earnings for 1999
climbing 87%, to $58.5 million, or 76 cents per diluted share, from $31.2
million or 29 cents in 1998 (excluding charges and gains in both years).
Consensus estimates for this year show earnings leaping another 43%, to
$1.09 a share. Last Friday, Antec's shares closed at 44 15/16, or 41 times
2000 earnings. At this price, it's market capitalization is around $2 billion.
Despite this more-than-respectable sales and earnings growth, Antec's stock
has hit two gut-wrenching air pockets in the past three months. On December
29, the shares fell sharply after Stanzione announced that operating costs
would be higher than expected. The problem: The company was late in
delivering a new generation of "powering products" -- amplifiers for signals
traveling across coaxial cables. "We couldn't get some of the products out of
the lab and into manufacturing as soon as we wanted," Stanzione says.
Though the company assured analysts its earnings target was still intact,
skittish investors sold off the shares, knocking them from 37 15/16 to 29
15/16.
So Stanzione hit the bricks.
In late February, he visited analysts and major investors, promising strong
revenue and profit growth in the first quarter.
His fence-mending was, unfortunately, for naught. Three weeks ago, he was
on the phone with analysts and investors. The message this time: First-quarter
earnings would come in on target, up 46% to 19 cents per share, from 13
cents per share reported in 1999's first quarter. But revenues would be $13
million shy.
Twice burned, investors hammered the shares from 59 5/16 to 46 1/2 that
week. Tim Quinlisk, a portfolio manager at Denver Investment Advisors, has
been building a position in the company since early January. "It's undeniable
that this company is the dominant player in its field," he says, noting Antec's
market share in some areas is 70%. "They've got an incredible market
opportunity."
Antec may not be as well-known as competitors such as Scientific Atlanta
and Tellabs, but it has a blue-chip customer list, including AT&T, now the
largest cable operator in the U.S. Indeed, on February 23 Antec signed a
contract for an undisclosed amount with the telecom titan to be its exclusive
supplier of cable telephony equipment in eight of its nine current markets.
Some observers believe those eight cities -- Chicago, Seattle, San Francisco,
Dallas, Denver, Pittsburgh, Hartford and Salt Lake City -- represent about
30% of AT&T's expected cable telephony market.
As we noted in a cover story last year ("Goosing Ma Bell," August 9, 1999),
AT&T is aggressively expanding and upgrading its cable systems for
telephony. And so far, the company hasn't had much trouble finding takers for
the new service in the cities where it's being offered. AT&T has signed up
more than 25,000 subscribers, and a few weeks ago the company told
analysts that it would have 400,000-500,000 telephony subscribers in 2000
and millions in 2001. If AT&T hits its target, that could mean at least $400
million in business for Antec.
Time Warner, Comcast, Cox, Cablevision and Adelphia are also Antec
customers.
In other words, demand isn't the problem. Communicating with Wall Street
analysts is. Antec's recent misstep arose after AT&T, which had been
aggressively purchasing in the fourth quarter, decided to lighten up in the first
quarter. As a result, Stanzione had to ratchet down analyst's revenue
expectations to $235 million from $248 million for the first-quarter. "If we had
it to do over again, we would have under-promised and over-delivered," says
Jim Bauer, Antec's head of investor relations. And yet, bulls on the stock,
including Quinlisk, believe that this one-time blip doesn't have much to do with
the long-term demand for cable telephony equipment.
There's also evidence Antec is ahead
of the curve when it comes to
anticipating the changes in the
phone-equipment market. The
company is developing Internet
Protocol equipment that can handle
both data and voice traffic on the
same line. This equipment will be
tested in trial sites in the second and
third quarters, and shipping is
scheduled to begin sometime in 2001.
Stanzione says the powering products
that put a strain on the company's margins in the fourth quarter are now hitting
the market. The product line, he says, will be back in the black in the second
half of this year.
Though it isn't immediately obvious, Antec has the wind at its back. Quinlisk
thinks the stock can get back to $60 a share in the next six months if the
company delivers. He's not alone. Anton Wahlman at Warburg Dillon Read
recently raised his price target on the stock to $70. "If these guys give us two
solid quarters," says Quinlisk, "then people will start to believe again."
interactive.wsj.com |
