Buy the pig!: "WSTL: STOCK WEAKNESS APPEARS TO BE OVERREACTION TO NEAR-TERM PROSPECTS
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Westell Technologies, Inc.
August 3, 2000
WSTL: STOCK WEAKNESS APPEARS TO BE OVERREACTION TO NEAR-TERM PROSPECTS
52 Week Fiscal ------ EPS ------ P/E Ratio Shares
Price* Range Year 1999 2000 2001E 2000 2001E Div Yield (Mils)
18.44 41-6 MAR ($0.94)A ($0.23)A $0.30 NM 61.5 0.00 0.0 62.6
*Prior Day's Close
Current Rating
Rating: Strong Buy S&P 500: 1,438.70
Suitability: Higher Risk Price Target: $48
* Westell's stock price has been under pressure the past several days.
* Weakness is due in part to the overall technology market, but also due
to prospective concerns over DSL deployment logistics with RBOC customers.
* Currently, there is no firm evidence of any DSL deployment problems
with any Westell customers, but Westell does have high dependence on
several key customers.
* DSL demand remains very strong among Westell's customer base.
* It is too early in the quarter to make any projection regarding
revenue forecasts, but no major changes in guidance is anticipated
regarding revenue and none regarding earnings.
* We believe that Westell remains one of the best vehicles for investing
in DSL local-loop access and that current valuation represents an
overreaction to near-term transitory issues regarding sequential revenue
growth in the quarter, which may or may not occur.
* Accordingly, we are maintaining our current estimate and outlook and
Strong Buy recommendation and would use the current weakness to accumulate
Westell shares.
Summary
Besides overall weakness in the technology market, the recent decline in
Westell shares reflects some concern over DSL deployment issues in the
carrier market. Westell now has 30 customers for its DSL modems in the
last quarter, but among these, there are only four which represent any
major significance: British Telecom, Bell Atlantic, SBC and recently
announced GTE. Of these four, SBC - representing the combination of three
RBOCs - is potentially the largest. Each of these customers is expected to
experience significant demand for DSL products over the next four quarters,
but prospective concerns over deployment logistics may create non-linear
growth.
DSL subscriber growth among Westell's customer base was strong in the last
quarter. For example, with SBC, the number of customers more than doubled
over the first quarter and the number of lines installed at the end of the
quarter reached nearly 400,000. SBC's order backlog at the end of the
quarter was more than 40,000 lines, and additional promotional initiatives,
including aggressively marketing of DSL in the Ameritech service area, are
expected to sustain growth in this quarter and going forward.
SBC currently does not appear to be experiencing any unusual delays in its
DSL deployments, but SBC also indicated in its second-quarter overview that
transitioning to a new system and ordering process, central office hardware
availability, some delays in regulatory approvals are factors in deployment
to meet the high demand. Bell Atlantic has gone through similar
transitions.
Westell's carrier customers seem to always have provisionary issues in each
quarter but, nonetheless, Westell has reported several strong quarters.
Currently, Westell is experiencing no change in its current business and is
not changing any guidance regarding its quarterly outlook. Westell also
believes that if there are any revenue issues, potentially involving its
largest customers, that earnings estimates are still valid since any
pushout of DSL CPE revenue is low-margin business. Westell also believes
any prospective revenue deferrals will be recovered in Q4.
Accordingly, there is no change in the earnings outlook for Westell despite
any prospective revenue issue in this quarter, which currently is not
evident in Westell's business. Additionally, other vendors are not
indicating any current deployment issues.
We are, therefore, not changing our recommendation or outlook on Westell
and believe any revenue issues are transitory and will not lead to any
earnings shortfall in the quarter. Our current estimate calls for another
strong quarter and sequential growth for Westell.
Consequently, we continue to believe Westell represents one of the best
vehicles for participating in DSL local Internet access, that Westell has
the most competitive product on the market and its technology capability
will leverage new-product initiatives and improving margins over the next
year and beyond. Accordingly, we maintain our Strong Buy rating. |
