You like MRVC? While JDSU put on 40% from Memorial Day to its summer peak, one shareholder put on 238% !
One to watch: FUWAY
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Furukawa Electric: Spin Off with a Spin to It
Net Stock Analysis
Fri, 9/22/00-2:06 PM by Henry Lee
Sometimes you never know what you will turn up with a little research. Having recently written an article about MRV Communications (MRVC: news, msgs) spinning off some of its optical networking subsidiaries, an article caught my eye. The article was mostly about MRV’s first IPO, Luminent Inc. (LMNE) but it mentioned another optical IPO called Optical Communications Products, Inc. (OCPI) which filed on August 31. Similar to the Luminent IPO, which is a spin off of MRV, OCP is a spin off of Furukawa Electric, Co. Ltd. My little investigation led to some interesting discoveries about its Japanese parent company.
Optical networking is probably the hottest sector in technology. Investors just cannot seem to get enough of companies associated with it. Because the Luminent IPO is such compelling factor for investors in MRV, a little investigation into the details of the Optical Communications Products, Inc. IPO seemed to make sense.
OCP focuses on active components, particularly transceivers that convert signals from optical to electrical and back. Its transceivers are specifically designed for Metro fiber networks. OCP also makes optical products used within buildings and optical connections among storage computers.
The details of the IPO price and shares offered have not yet been announced, but it plans to raise $100 million or more from its offering. The parent company currently owns 66 million shares and options to purchase nearly 10 million more for $0.09 each. In total, this accounts for about 70.3% of the 103 million shares outstanding.
The company seems to be growing very rapidly in its sales to large customers such as Cisco Systems (CSCO: news, msgs), Nortel Networks (NT: news, msgs), Ciena (CIEN: news, msgs), Lucent (LU: news, msgs) and European technology giants such as Marconi and Alcatel. In fiscal year 1999, OCP posted $36 million in revenue. In the first nine months of 2000 alone it has sales of over $69 million. In 1999, they managed to earn $4 million, but in 2000, their profits are already up 300% to $16 million with three months still to go. On its own, OCP seems to be a pretty solid company.
The parent company, Furukawa Electric is a major international player in optical networking. It manufactures mostly electric and optical wire and cable among its diversified holdings. Like so many Japanese conglomerates, its list of subsidiary companies is vast and difficult to make sense of. All together, Furukawa’s operating companies posted sales of approximately $4.7 billion for the last year, though sales for the last six months declined by about 5% due to a slow down in demand for its power cables. The Japanese company trades on the NASDAQ BB in the United States under the symbol FUWAY.
Investing is never clear-cut though. Investors should generally avoid stocks that lack readily available information -- bulletin board stocks by definition lack full disclosure. The company Web site has some helpful information including financial statements that will aid your fundamental analysis, however, following the daily movements of the stock could be a chore unless you speak Japanese. Sometimes lack of information can be an advantage to those willing and able to do the research. It isn’t easy to find the hidden gems when everyone has the same tools and access to the same knowledge you do. The few with the skill to take advantage of the inequities in information walk away with the riches.
Furukawa does seem to have a hidden gem that has only been discovered by a few. Kevin Landis, from the top performing technology mutual fund company Firsthand Funds, has indentified the opportunity and purchased shares in Furukawa because of it. It turns out that Furukawa used to own shares of JDS Fitel before it merged with Uniphase to become JDS Uniphase (JDSU: news, msgs), perhaps the most dominant company in the manufacturing of optical components. In fact, Furukawa owns a lot of JDS Uniphase, to the tune of 144,734,080 according to the Schedule 13G JDS Uniphase filed with the SEC. That accounts for 17.16% of the $84.4 billion market capitalization for JDS Uniphase, making Furukawa’s stake worth $14.5 billion.
So where is the opportunity here? Furukawa’s total market capitalization is $17.2 billion. Could the 67 subsidiary companies listed on Furukawa’s web site be worth only $2.7 billion? Certainly they could, but consider that one of those 67, Optical Communications Products, Inc., previously mentioned in this article, is looking to raise $100 million in an IPO. If you assume they will sell 10% to the public, a market capitalization of $1 billion seems reasonable. If JDS Uniphase goes to $128 a share, you won’t even have to try and figure out the value of Furukawa’s other holdings. At $128 a share, Furukawa’s JDS Uniphase shares would be more valuable than all of its own. The high for JDS Uniphase is $153 a share.
Perhaps JDS Uniphase is overvalued and a slide in its shares will bring down Furukawa? The OCP offering could be a bust and it is unclear whether or not shareholders of Furukawa will receive shares in the new company. Investors may never catch on to the value of Furukawa’s holdings. Furukawa is no sure thing. There are still a lot of uncertainties surrounding the stock but 144 million shares of JDS Uniphase make for a pretty nice security blanket. Only time will tell if this is a profitable opportunity but it certainly is an interesting example of how you can find inequities in the financial markets if you know how to look for them. Uncover enough if these kinds of inequities and sooner or later you will find that gem.
-- Henry Lee is President of InterNetGains Investments a day trading and consulting company. Send comments to: henry@internetgains.com |
