JDSU/CSCO--individualinvestor.com
Other: Tomorrow's Tech-Stock Superstars
Research Analyst: Bob Hirschfeld (09/13/00)
Every investor dreams of finding the next Cisco Systems (NASDAQ: CSCO - news) or JDS Uniphase (NASDAQ: JDSU - news) and snapping up the shares before they soar. And even with this year's correction in the Nasdaq Composite Index -- still down 4.25% year-to-date -- those technology bellwethers continue to trade at astronomically high price-to-earnings ratios.
The trick, then, is to find the future Ciscos and buy them when they're cheap. Two tech stocks we think fit that description are up-and-comers in their respective sectors: Teledyne Technologies (NYSE: TDY - news) in optical networking, and Globix (NASDAQ: GBIX - news) in the web-hosting area.
Both are companies with market capitalizations in the small- to mid-cap range. The market caps of Teledyne and Globix are $857 million and $1 billion, respectively. In contrast, Internet business-to-business (B-to-B) company Ariba (NASDAQ: ARBA - news) boasts a hefty $36 billion market cap, while Web-hoster Exodus Communications (NASDAQ: EXDS - news) has a bountiful $25 billion market cap.
Mid-cap stocks have been the place to be this year, outperforming their larger-cap brethren. As of September 11, the Russell Midcap index was up 12.8% this year. That beats the meager gains of the S&P 500, up 1.7%, and the NASDAQ 100, up 2.8%.
Teledyne is a defense supplier that is moving into the area of fiber-optic component manufacture. But the company isn't exactly in the limelight. Only four analysts track the stock. Just two of them rate Teledyne a ``buy,'' and one of them, Mark Jordan, works for A.G. Edwards, which provides investment banking services to the company.
Jordan initiated coverage with a ``buy/aggressive'' on August 18, citing his conviction that Teledyne's core defense-oriented business will produce modest trend-line revenues and earnings growth. And when its fiber-optic component manufacture business kicks in, which will likely occur during the second half of 2001, earnings growth should accelerate. Jordan expects the added visibility of Teledyne's fiber-optics unit will lead to an expansion in its multiple over the next 12 months, and drive earnings growth to between 15% and 20%, well above its current high single-digit rate.
Confidence in Teledyne's fiber business no doubt increased on August 3, when fiber optics firm Corning (NYSE: GLW - news) announced an initial $1.8 million order for the contract manufacture of fiber-optic transmission laser modules, to be sold to Corning's customers.
Though Jordan estimates it will take at least a year for Teledyne's fiber-optic business to take off, the company is financially solid, with a debt-to-capital ratio of about 6%, and sufficient cash flow ``in the hundreds of millions'' of dollars to pay for the necessary capital expenditures needed for build out, he says. Given the company's investments in fiber-optic infrastructure, however, the company will likely face tough comparisons over the next few quarters.
The company's background is in defense electronics -- it provides fiber-optic transmission modules for the new F-22 fighter. That means that while its offerings are small and delicately fine-tuned, Teledyne is less equipped, at present, to produce them in commercial volumes.
In its effort to reshape itself, Teledyne plans to shed some of its older, more industrially oriented units. At present, the conglomerate includes such diverse businesses as cast engine (turbine and piston) parts, towed arrays used by the offshore oil seismic industry, and aircraft data recorders.
Teledyne was spun off from Allegheny Technologies (NYSE: ATI - news) in November 1999; its shares have been as high as $30 and currently trade at about $28. His price target is a modest $30, but since Teledyne is increasingly accorded a fiber-optic multiple, shares could at least double in a year.
Turning to our other tech play, Web hoster Globix houses, serves, and maintains both the computers that store websites and the high-speed connections to telecommunications networks.
Though not yet profitable, Globix had strong revenue growth in the third quarter, achieving 50% growth in sequential Internet revenues, a full 12% ahead of consensus expectations. And overall revenues doubled year over year.
Revenue mix improved during the quarter, shifting to 72% for Internet services and 28% for equipment sales, compared with 58% and 42%, respectively, in the second quarter. That helped gross margin to expand to 51% from 43% sequentially.
Globix offers such hot Internet services as streaming media, which increased to $239,000 from $149,000 sequentially, and application services, which rose to $850,000 from $680,000 from quarter to quarter.
Though the revenues mix is growing more profitable, the company continues to spend heavily to build its data center facilities, known as SuperPOPs, says UBS Warburg analyst Glenn Waldorf. During the quarter, build-out expenditures came to $53 million, though Globix currently has cash of about $500 million, which Waldorf believes is enough to sustain the company through 2001.
Globix's three SuperPOPs are located in key information centers in Silicon Valley, New York City, and London. Moreover, according to Waldorf, the data centers are state-of-the-art, providing business customers with power backup, security, and information replication.
Waldorf's forecast calls for dramatic top-line growth but a protracted wait for bottom-line growth; The company is likely to report losses for at least the next three years, he says. Revenues, however, will expand to $82 million for fiscal 2000 from $34 million in 1999, then increase sharply to $191 million in 2001.
Waldorf, who rates the shares a ``buy,'' notes that Globix trades well below its peer Web-hosting group, at 5.4 times revenue, versus 8.8 times his year 2001 revenue forecast for the group. Compared with Exodus, Globix is even cheaper, as Exodus trades at 14 times revenues. On a discounted cash-flow model basis, Waldorf forecasts a target price of $42 per Globix share, a 45% premium to its recent price. |
