Insider Selling and Provisioning Issues Hit Shares;
Reiterating BUY Rating
The share price of Westell Technologies stock has fallen nearly 50% during the
past week, closing last week at $17.06. In addition to the market's overall
recent weakness, we believe there are several issues worrying investors, all of
which should prove to be temporary problems.
Several insiders, most notably CEO Marc Zionts and President J.W. Nelson, have
sold large blocks of stock in recent days. Zionts sold 225,000 shares, or 22% of
his personal holdings, and Nelson sold 100,000 shares, or 14% of his holdings.
Instead of selling large blocks such as these, we think managements of public
companies serve themselves and other shareholders best by establishing "orderly
sale" programs that place a predetermined number of shares on the market each
quarter.
That said, we don't regard the insider sales as indicative of a bail-out by
senior management, as the sell-off in the shares would seem to suggest. We have
witnessed management bailouts, and they are usually far more sweeping and
lucrative than the Westell situation. Zionts, in particular, saw Westell
through a difficult period during which the Company's stock fell below $4 a
share and rallied to $40. We don't think $4 million to $5 million worth of stock
sales is an outlandish reward.
Beyond the insider sales, one of our competitors issued a warning of a potential
build-up in inventories of Asymmetric Digital Subscriber Line (ADSL) equipment
at SBC Communications, a major Westell customer, possibly coinciding with line
provisioning problems there.
We have always regarded RBOC provisioning to be the potential Achilles Heel of
the DSL story, as it applies to both businesses and consumers. Indeed, recent
reports from Competitive Local Exchange Carriers (CLECs), which depend on RBOCs
for their last-mile connections, would seem to support the doubters. We think
Rolla Huff, CEO of Mpower Communications, said it best on a conference call last
week when he termed the RBOCs as partly malicious and partly incompetent when
it comes to their inability to fulfill their DSL deployment commitments.
The Bells are wrestling several alligators, including poorly trained personnel,
a lack of provisioning systems and degraded copper plant, not to mention their
tendency to hype technology fads whenever they want new privileges from
regulators, such as entry into long-distance markets. Beyond those chronic
issues, however, we know of no immediate problems at SBC. In fact, we think this
telco is accelerating the pace of its ADSL rollout to pre-empt competitors
approaching from a number of angles.
Furthermore, we think our projections for Westell's ADSL revenues-$70 million in
the Company's second fiscal quarter to end in September, up 14% from
first-quarter levels-allow for potential provisioning problems at RBOCs. We
believe any kinks in the system will prove temporary and will leave our
estimates unaffected. With DSL still in its infancy and with SBC's Project
Pronto being a major driver of deployments, we don't expect any slowdown in this
channel to be long-lived.
Finally, labor negotiations at Verizon Communications, a major customer, could
also impact Westell by slowing or halting ADSL deployments, but we believe this
possibility is minimal. A prolonged strike would be needed before DSL
deployments slowed to a level that would cause Verizon to consider canceling
modem orders.
Overall, we consider Westell to be a fundamentally sound company and are
comfortable with our current estimates. We reiterate our BUY rating, with a
one-year price target of $40, and believe the recent weakness in the stock price
represents a good buying opportunity.
WESTELL TECHNOLOGIES, INC. FYMar. EPS* Prior Est.
WSTL - $17.06
Rating: BUY 00A ($0.23) NC
Price Target (12 mo.): $40 01E $0.32 NC
Charles W. Pluckhahn, CFA (617) 239-7514 02E $1.29 NC
*Exclusive of amortization expense and untaxed
Other public companies mentioned in this report:
SBC Communications Inc. (SBC - $43.94)
Verizon Communications (VZ - $46.94)
Mpower Communications (MPWR - $46.00; BUY) |
