from saturday's individualinvestor.com
A Dirt Cheap Fiber Optics Incubator
Editor-in-Chief: Jonathan Steinberg
The advent of the Internet and the subsequent spawning of dot com companies coincided with the rise of a new type of
company - the incubator - which is essentially a publicly traded venture capital firm.
During the heady days of dot com mania, companies such as CMGI (NASDAQ: CMGI - Quotes, News, Boards) and
Internet Capital Group (NASDAQ: ICGE - Quotes, News, Boards) soared, gaining an average 980% in 1999 alone. The
subsequent pricking of the dot com balloon has had an equally significant and adverse effect. Shares of these two major
incubators are down an average 76% year-to-date and are hovering close to 52-week lows.
Does this swoon herald the decline of investor interest in incubator companies?
Not necessarily. The key ingredient that attracted investors to incubators was the perception that these companies represented
an opportunity to profit from IPOs of the hottest sector of the financial markets.
Simply put, any incubator will perform only as well as the sector it has targeted and while it can safely be stated that the dot
com segment has stumbled badly, other sectors continue to display explosive growth and this is where incubator companies are
likely to flourish in coming quarters.
One of our favorite sectors continues to be telecommunications equipment manufacturers.
These companies are benefiting from the build-out of ever-faster networks needed to satisfy the burgeoning demand for
Internet service as well as from continued strong growth in the wireless market.
These companies, ranging from JDS Uniphase (NASDAQ: JDSU - Quotes, News, Boards) to fiber optic subsystem
supplier Finisar (NASDAQ: FNSR - Quotes, News, Boards) to optical network supplier Ciena (NASDAQ: CIEN -
Quotes, News, Boards) have been among the best performers this year, up an average 114% year-to-date, despite the
Nasdaq being down about 4%.
We believe that this sector will continue to be one of the best performing areas of the market over the next few years and that
one of the more interesting plays in the sector is MRV Communications (NASDAQ: MRVC - Quotes, News, Boards), a
company that acts as an incubator for companies involved in the fiber optic, optical networking and Internet infrastructure
markets.
Sounds pretty sexy, eh? Investors obviously think so as shares are up 80% this year and are trading at nearly 380 times fiscal
2000 earnings estimates of $0.15 per share. There's no denying this is a extremely rich multiple but, as is the case with
incubators, the story isn't about earnings but about the value of its stake in various privately held companies that can be brought
public and MRV's portfolio is rich indeed. The stock closed Friday at $56.50.
After a spate of recent acquisitions, including the purchase of privately held fiber-optic manufacturers Optronics International,
Quantum Optech and Fiber Optic Communications, MRV recently filed for an IPO of Luminent, its 90% owned fiber-optic
subsidiary. The company is seeking to raise $207 million from the IPO that is scheduled to occur in mid to late October. (The
number of shares and pricing has yet to be determined.)
We believe this IPO will be very favorably received if the market reaction to the recent Corvis IPO (NASDAQ: CORV -
Quotes, News, Boards) is any indication. Corvis, whose products enable the creation of all-optical backbone networks, went
public in late July at $36 per share (the company raised a record $1.14 billion) and saw its share price promptly climb to a high
of $114.75 a little over a week later.
Corvis shares, which have fallen back to a recent $72.75, are still up more than 100% in less than two months and the
company sports a market cap in excess of $24 billion. Not too shabby for a company that generated no revenue in the most
recent quarter.
Considering that MRV Communications has a total market cap of $3.6 billion, shareholders could significantly benefit from the
IPO, especially considering that management has said it intends to spin-off the remainder of Luminent to shareholders within six
to 12 months of the IPO.
The Luminent spin-off alone would be enough to justify investing in MRV but that's just the tip of the proverbial iceberg. The
company recently told investors that it plans to file for an IPO of Optical Access, its optical networking division, within the
October time frame as well.
While the size of the Optical Access IPO is as yet undetermined, we believe that the business is as sexy or sexier than
Luminent's and could generate just as much investor enthusiasm. Together, the Luminent and Optical Access IPOs are a
one-two punch that should make MRV shareholders woozy with delight.
Let's not forget that the company also has a number of other operating divisions including Nbase (Internet infrastructure
switching solutions) and iTouch (next generation Internet infrastructure solutions) that could be spun-off further down the road.
In addition, MRV has substantial stakes in a number of developmental stage companies including a 20% stake in Zaffire (a next
generation Internet network developer), a 90% stake in Zuma Networks (developer of next generation Internet routers), a
53% stake in Charlotte's Web (Terabit routers for Internet infrastructure) and a 42% stake in Hyperchannel (European B2B
E-commerce for the IT industry), among others.
Simply put, the two upcoming IPOs of Luminent and Optical Access should drive MRV's shares in the near term while its rich
portfolio of cutting edge subsidiaries could provide the ability to further unlock shareholder value.
Bottom Line:
MRV looks like CMGI did in its infancy. If you missed out on that ride, get on board this one. It should be fun.
I.I. Online's profiles are condensed reports on companies that may be attractive investment opportunities. You should thoroughly
investigate any company presented here before making any investment decisions. |
