From The Bull Market Report, FWIW....
COPPER MOUNTAIN LOOKS STRONG
COMMENT: We haven't mentioned Copper Mountain (CMTN, $47, down 3) in
awhile, but we still like this provider of digital subscriber line (DSL)
equipment. The company's products allow carriers and service providers to
offer high-speed data and voice services over the existing copper wire
infrastructure, and this market will explode as we start to see increased
demand for broadband services.
Copper Mountain is uniquely positioned to profit from America's desire for
high-speed data services. The number of DSL subscribers in this country
is expected to grow from 500,000 last year to 2 million this year, and
could reach over 14 million by 2003. This is an explosive opportunity and
Copper Mountain stands to capture a large piece of the action.
The company is benefiting greatly from strategic relationships it has made
with modem and equipment vendors. As a good example of this, let's look
more closely at the DSL equipment market. It is interesting to note that
there is really no standardization among DSL equipment vendors. Because
of this, modems from one vendor often times do not operate well with
central office equipment from another vendor. However, Copper Mountain
has worked out a number of strategic alliances that ensure the
interoperability of its central office products with modems from a number
of different vendors, thus giving the company a significant edge when
competing with rival DSL firms.
Copper Mountain is not only doing well in the U.S. market, but they've
also diversified by moving overseas. In May the company won a big
contract with Versapoint, which is a joint venture between NorthPoint
Communications (NPNT, $10, down 0.50) and Amsterdam-based VersaTel (VRSA,
$26, down 1). Under the terms of the deal, Copper Mountain will deploy
its flagship digital subscriber line access multiplexor products to over
2,000 European central offices. Copper Mountain is already involved in
several other international markets as well, including both Canada and
Asia.
But why has the stock fallen from its July high of $125 all the way down
below $50 a share? A lot of it has to do with a general decline in
DSL-related issues. Take NorthPoint and Covad (COVD, $19, down 2) as two
good examples. Both DSL service providers are down more than 60% from
their annual highs.
Another reason why Copper Mountain has crumbled is because of concern over
the financial resources of local exchange carriers. Since the vast
majority of Copper Mountain's sales go to these telecommunications
carriers, such as SBC Communications (SBC, $46, unch.) and Verizon (VZ,
$45, unch.), Copper Mountain would face serious trouble if these firms
decided to cut back on their investments in DSL technology. With the
stock prices of many major telecommunications firms falling over the last
few months, the fear is that these companies may look to cut their
investments in DSL over the next few quarters. We don't think so.
The final concern with this stock surrounds the company's exposure to
Lucent (LU, $37, down 2). About 30% of Copper Mountain's sales in 2Q went
to Lucent, yet these sales will undoubtedly dry up as Lucent begins to
develop its own DSL product line. We feel that original equipment (OEM)
sales, like those to Lucent, will become less and less important for
Copper Mountain, and we don't see reason for long-term concern here.
Copper Mountain is going to rebound over the next several months, and the
investment community is slowly starting to see things our way. Morgan
Stanley has a $150 price target on the stock and estimates that the
company will earn $1.36 next year with possibly $2.00 the following year.
They also expect to see a 40% long term earnings growth rate, which would
make Copper Mountain one of the fastest growing companies in the
communications space. With the stock on the decline in recent months,
Copper Mountain's valuation is now very attractive for long-term
investors, and we expect to see a number of analyst upgrades in the fourth
quarter because of the share price weakness. This should help to renew
interest in the DSL sector, and Copper Mountain's stock will benefit
greatly. We would be aggressive buyers of the company's shares in the
$40's. |
