PWAV Down on Erroneous Korean Exposure Report: BUY, Add to Focus List.
Excerpts from H&Q Research 6/19/00, 7:29 AM, Price: $49.75
* Sell-side report sets Korean exposure 10% too high.
* Strong demand for TDMA and GSM products provide resilence to Korean slowdown.
* Anticipate demand for 2.5G/3G amplifiers to accelerate revenue to mid-2001
from 2H2001.
* Expect modest upside in revenue and earnings for June quarter.
* Reiterate BUY, increase price target to $75 and add to FOCUS LIST.
1999 A 2000 E 2001 E
Q1 EPS $0.04 $0.16 $0.18
Q2 EPS 0.07 0.16 0.20
Q3 EPS 0.09 0.14 0.20
Q4 EPS 0.13 0.19 0.26
FY EPS 0.33 0.65 0.84
FY REVS (M) 292.5 440.3 553.2
CY EPS 0.33 0.65 0.84
CY P/E 151x 77x 59x
FY Ends Dec Current Price $49.75
52-Week Range $8.8-74.0 Market Cap (B) $3.25
Shares Out (M) 65.28 Book Value $3.03
Net Cash/Share 1.30 3-Year EPS Growth 60%
CY01 P/E-to-Growth 98%
We believe the sell-off on an erroneous report of Korean exposure is
unwarranted. The stock traded down Friday on an erroneous sell-side report
stating that 18% of the company's revenue is derived from Korea. Powerwave has
less than 8% revenue exposure to Korea. The company has diversified its
product base since the 1997 Korean currency crisis and now derives more 92%
from non-Korean sources.
CY97 CY98 CY99 1Q00 2Q00(E)
Korean Revenue 83% 30% 21% 8% <8%
Source: Company Reports, H&Q Estimates
Strong demand at Nortel, Ericsson and Lucent has shifted Powerwave heavily
into non-cdma technologies. At 41% of total revenue, Nortel is far and away
the company's largest customer. Nortel's win of AT&T's business last year has
fueled Powerwave's growth in TDMA products. Increased demand from Ericsson
and Lucent has further accelerated this trend so that nearly two-thirds of the
company's CY2000 revenue is derived from non-cdma technologies.
Customer Concentration CY97 CY98 CY99 1Q00 2Q00(E)
Korean OEMs 83% 30% 21% 7.8% 5%
Nortel <5% 52%** 41% 41% 42%
Ericsson 0% 0-5% 5-10% 10% 12%
Lucent 0-5% 5-10% 5-10% 5-10% >5%
* Includes Samsung, Hyundai, and LGIC.
** Nortel Represented 52% of sales in the fourth quarter of 1998.
Source: Company Reports, H&Q Estimates
Completion of UMTS spectrum auctions may accelerate 2.5G product revenue
from 2H 2001 to mid-2001. The completion of 3G spectrum auctions in numerous
European countries signals the beginning of a race to deploy systems.
Powerwave is well positioned to deliver 3G products to domestic and European
OEM's that we believe are accelerating 2.5G/3G deployment plans. We
anticipate improved visibility on these roll-outs in the September quarter but
expect Powerwave will be bullish on the prospects on the July conference call.
Expect upside to revenue and earnings estimates for the June quarter,
reiterate our BUY rating. Checks suggest the company will post a modest
upside to our $108 M revenue estimate and beat our $0.16 earnings forecast for
the June quarter. Strength in infrastructure demand, especially in the US and
Europe should result in a bullish forecast. We expect revenue and earnings
guidance to be positive and estimates to increase, particularly so for 4Q00
and 1H2001. At a P/E of 59x, the company is trading at a 17% discount to to
the median multiple of comparable companies. We believe the stock is poised
for short term appreciation as the correct information on Korea, better-than-
expected quarterly performance and bullish company guidance filter into the
stock price. We therefore reiterate our BUY rating, establish a $75 target
price and place the stock on the FOCUS LIST. |
