Great article from F.P. on fiber
How to buy fibre that's good for you
Valuations in fibre optics may be stretched, but the pros insist the boom is here to stay
Scott Adams
Financial Post
Corbis
For fibre-optic companies, already rolling in profits, growth is really beginning to take off.
Fred Greenslade, National Post
Mark Rarog, Investors Group mutual fund manager, says investors have adopted a herd mentality regarding fibre stocks.
The fibre boom is in full swing. Stocks in the sector have been red-hot, there's been a spate of multibillion-dollar takeovers and then yesterday a fibre play, Corvis Corp., set a record for the largest market debut in history for a company with no revenues, never mind profits.
Given the sector's explosive growth, money managers insist Canadian investors can't afford not to have fibre in their portfolio, especially exposure to firms in the fibre-optics equipment business.
That said, they also tend to agree that valuations have been stretched and there is no easy money left to be made. Indeed, fibre stocks have been among the big losers in the selloff that hit technology stocks this week, serving up major losses to emerging Canadian fibre plays like GSI Lumonics Inc. (LSI/TSE), down 43% in six days, and Exfo Electro-Optical Engineering Inc. (EXF/TSE), down 40% in the past four days.
So which ones should you own? Is this a bubble that is going to burst the way dot-coms did? Is it too late to get in?
The professionals say the boom is here to stay. Unlike dot-coms losing money hand over fist, fibre-optics companies are already rolling in profits and growth is taking off.
The pros say the best bets are still the heavyweights and Canada has two gorillas: Nortel Networks Corp. and JDS Uniphase Corp. These are must-own stocks, though investors might have to be patient and buy on weakness.
"I would definitely want some exposure," said Ian Ainsworth, Altamira Management Ltd. portfolio manager, adding he would buy a little Nortel almost any time, but would wait for JDS to fall back at this point.
Among the smaller players, the pros say investors have to be able to tolerate some intense volatility.
"Some of these are excellent companies," said Martin Hubbes, portfolio manager with AGF Funds Inc. But in any correction, smaller players with high valuations are going to get pasted, he said.
Recent trading in GSI Lumonics provides a good taste of how volatile stocks in minor players can be, especially those with relatively minor exposure to fibre. GSI, which supplies laser-based manufacturing systems to industrial concerns worldwide, expects to derive 10% of its revenue from fibre next year, up from 1% this year.
Last week, GSI ranked as the top performer on the Toronto Stock Exchange 300 composite index.
Fickle investors have knocked more than $1-billion off the firm's market value in the past seven days. GSI is now the TSE 300's fourth-best performer, with a still respectable gain of 181% in 2000.
The main reason investors are so bent out of shape about fibre optics is the Internet. Fibre optics is the technology of sending communications signals by light over glass cables and it is faster than sending electronic signals over copper wire.
Fibre is allowing the world to use the Internet more and more in everyday life.
Fibre consultant firm RHK Inc. forecasts the global optical systems market reaching about US$90-billion in 2003, triple the amount last year.
Stock valuations have soared, with Nortel shares trading at 104 times next year's earnings, while JDS is trading at 180 times. Yet in today's market, the focus is less on valuations and more on how fast these companies are growing and just how much leadership they have over their competitors.
The problem with finding breakout stories is that every stock that has anything to do with fibre optics already has gone through the roof.
"There is no rock unturned," said Peter Schendel, portfolio manager with Strathy Investment Management in Toronto. "People have looked at everything."
Mark Rarog, portfolio manager with Investors Group, says a herd mentality is at work. "Guys feel they have to own something in this space."
Here is a snapshot of some of the largest Canadian fibre plays.
COMPONENT SUPPLIERS
The market cap of Canada's JDS Uniphase has reached US$108-billion and the stock has gained 44% this year. JDS, a world leader in its field, sells components to fibre-optics systems builders, or companies that assemble parts into full systems.
SYSTEMS SUPPLIERS
Nortel takes components from suppliers and builds them into complete systems. It has its own components business, which it planned to sell to Corning Inc. for US$100-billion before the deal fell through on Thursday.
Of Nortel's sales, its fibre-optics business is the fastest growing. Sales are expected to reach about US$12-billion this year and US$20-billion next, from US$5-billion last year.
OUTSOURCING ASSEMBLERS
Celestica Inc. (CLS/TSE) is an electronics equipment outsourcer. Traditionally, companies like Celestica have assembled electronic components, but Celestica does assembly for 13 fibre customers, including JDS Uniphase.
Celestica won't say how much revenue it expects from fibre, but it will reach US$10-billion in annual sales in the next 18 months and half of that will come from communications equipment -- including a "significant piece" from fibre, said Dan Shea, chief technology officer. The key to watching Celestica is its operating profit margins, which are at 3.5% and need to improve to where the company's peers are at 5%.
C-MAC Industries Inc. (CMS/ TSE) is a smaller outsourcer than Celestica, with two-thirds of its revenue coming from Nortel -- and two-thirds of that from Nortel's optics area. For every dollar Nortel makes in optics, C-MAC gets about 9% from assembly.
The stock is a great play on Nortel's fastest-growing business, but investors may want to avoid owning too much of C-MAC if they already own a fair amount of Nortel.
EQUIPMENT TESTERS
Exfo Electro-Optical Engineering makes test, measurement and monitoring equipment for the fibre-optics industry. The company went public at $38.55 a share in July and hit $134 on the TSE before the reality check. Yesterday, it closed at $73.95.
PERIPHERAL PLAYERS
GSI Lumonics makes laser manufacturing systems for the automotive, semiconductor and electronics sectors and has found that some of its parts can be used in optics. Fibre sales totalled 2% in the first quarter this year. Last week, GSI said it is buying an unnamed fibre company and now expects expects 10% of its revenue to come from optics in 2001.
ATS Automation Tooling Systems Inc. (ATA/TSE) makes assembly lines for the automotive, health-care and electronics sectors. About 3% of its revenue came from fibre-optics automation in fiscal 2000, but 6% in the past quarter, a spokesman said.
ATS won't say how much more automation business it can do in fibre, but the whole fibre industry is so new that any manufacturing isn't highly automated yet.
Further out on the periphery, are such players as Imperial PlasTech Inc. (IPQ/TSE), which makes plastic tubes for fibre cable; Badger Daylighting Inc. (BAD/TSE), which digs trenches for fibre cable; and Roctest Ltd. (RTT/TSE), which holds 1.2 million shares of Corvis, the hot public offering this week that soared to US$84 23/32. |
