No IF strips in our future. Analysts eat crow.
For much of the past decade, Sawtek Inc. has ridden the wireless wave to solid sales and earnings gains and a spot among the leaders in sound wave technology. But last week the company's stock got a body blow, courtesy of Qualcomm Inc.
The telecom giant on Dec. 18 announced it had created "direct conversion" technology that will eliminate the need for Sawtek's intermediate-frequency gear in its Code Division Multiple Access, or CDMA, cell phone handsets. Sawtek's stock plunged more than 20 points in the first hour of trading that day. Analysts expected Sawtek's gear eventually would become obsolete. But some were shocked at how quickly it happened. "We are surprised by Qualcomm's announcement, because Qualcomm and others have previously suggested a CDMA direct conversion solution is three to five years away," wrote First Union analysts Mark Roberts and Michael Whitfield, who downgraded the company's stock.
Sawtek's shares opened at 65 the day of the announcement. The stock closed the day at 53 314 and now trades as SAWS near 46 -just more than half its value early this month
Market Overreaction?
The news came during a period of record financial results for the company. It posted sales of $160 million during fiscal 2000, which ended Sept. 30. That was up 59% from a year earlier. Earnings for the year climbed 78% to $1.28 a share. Analysts polled by First Call expect fiscal 2001 earnings to climb 39% to $1.78 a share, then tally $2.22 a year later.
The strong growth might be the reason some analysts actually upgraded the stock, on the theory that the market overreacted to Qualcomm's news. "We felt it was not a major competitive issue facing the company," said Ted Moreau, managing director of research at Robert W. Baird, after he upgraded. "It was not totally unexpected, and it's a couple of years out in impact."
Sawtek officials downplayed the problem, saying investors should not be all that surprised.
"(Qualcomm} actually made an announcement last February that they're working on this," said Chief Financial Officer Ray Link. "We've been including this as a cautionary risk for investors for a year."
The type of gear Qualcomm will render obsolete comprised 22% of Sawtek's business in 2000. That share already was down from 30% in 1999. The company's focus lately has centered on other products. This year it began making radio-frequency filters, which can be used in a variety of cell-phone systems. Jt also is eyeing the market for filters used in broadband cable modems.
First Union's Roberts says Sawtek won't be sunk by the loss of one market. "This is a company that is constantly evolving," he said. "One of the exciting things about it is that it's very aggressive in finding new uses for its technology. This year, 20% of its revenue will come from product categories that didn't exist two years ago."
Change At The Top
Analysts don't sound too concerned about the impact of recent management changes. Last month the company named Kimon Anemogiannis chief executive. Ex-CEO Gary Monetti stepped down for health reasons. Anemogiannis had risen from within the firm. "One factor that gives me comfort is that it does have high-quality management," Roberts said. "They understand the requirement for flawless execution." U.S. Bancorp Piper Jaffray analyst Samuel May agrees. "It's a very well-run company with a lot of depth in its employees. I'm not at all concerned about the new CEO," he said. . Analysts also sound enthusiastic about Sawtek's international moves. After taking a hit from the Asian meltdown in 1998, Sawtek has begun shipping products to new clients in China, which is undergoing a. major initiative to build out its cell-phone infrastructure. The firm has a similar effort under way in South Korea. "In China it's already making meaningful revenue," May said. "There were concerns about the slow growth of subscribers in the Korean market, but that was a bit of an overreaction." in July, Sawtek finished construction of a manufacturing plant in Costa Rica. The facility doubled its manufacturing capacity there. Link says Sawtek is "bullish" on Costa Rica because it boasts an educated work force and low costs in a brutally cost-conscious industry. Still, there's no denying that Qualcomm's advances have rattled Sawtek's cage. Analysts such as Roberts and Whitfield, who've been denying -rumors all year that this would happen, have had to eat some of their words. But Sawtek has time to prepare it's self for changes in the CDMA market. Since Qualcomm said it won't even sample the new technology for another year, Link and the analysts don't see it affecting Sawtek's revenue until 2002 at the earliest. In the meantime, they say, Sawtek can innovate its way out of its present jam.
"Technology obsolescence risk happens to all technology companies," Roberts said. "Sawtek's business model is not static. As the technology evolves, advances are made someplace else that open up a filtering opportunity. |
