SDL Suffers Despite a Strong Future
By Jay Somaney
1/26/01 9:19 AM ET
Think back to this time last year. If a company had grown its year-over-year revenue by a multiple of 3, beat analysts' estimates by 4 cents a share and raised the bar for the current year, what would the market's reaction have been? Probably, to quote that guy in the cheesy daytrading commercial, "To the moon, Alice."
SDL (SDLI:Nasdaq - news - boards) reported revenue of $175.6 million and earnings of $48.2 million, or 53 cents a share. Analysts were expecting earnings of 49 cents a share and revenue in the $170 million range. The company continues to be a cash-flow machine, increasing cash flow for the year to $166 million, or approximately 33% of full-year revenue of $505 million. The company's inventory turn was an impressive 5 times, and DSOs (or days of sales outstanding) remain at 58 -- below the target level of 60. However, the stock closed Thursday at $199.19, down a nice chunk of change from Wednesday's close of $232.13.
Although the decline reflects the current climate in the equity markets, it also can be blamed on two other factors: Corning's warning of a tough first half of 2001 and, more so, the further delay of JDS Uniphase's (JDSU:Nasdaq - news - boards) complete acquisition of SDLI. The Street had expected the merger to be wrapped up by January, but JDS announced that the merger would be delayed until February due to regulatory concerns. Some analysts also believe that the Department of Justice may have further concerns about the merger. That didn't seem to sit well with investors.
In contrast to Corning's caution about the first half of 2001, SDL reiterated its previous revenue estimates of $193 million to $202 million for the first quarter -- and raised its earnings expectations for the quarter by 3 cents to 56 cents a share.
For the year, the company was confident that it would hit the $1 billion mark in revenue. Current estimates for annual per-share earnings range from $2.65 to $2.85, although most analysts will likely be revising upward based on guidance from management regarding the first quarter.
In a conference call Wednesday night, management stated that they were offering price reductions in some product lines to stimulate growth. The company also is seeing a broadening of its customer base and reported good demand with strong growth expectations for the second quarter onward.
My Take
In my opinion, the merger will be completed next month, and the combined companies will be a major presence in what seems to be a market with insatiable demand for its products and services. The need for increased bandwidth for the transmission of high-speed data, voice and audio/video seems virtually limitless -- at least for the foreseeable future.
Although SDL's stock is very expensive, trading at approximately 75 times average EPS estimates for 2001, this is a company that has the products, lead time, market demand and management team to enable it to continue growing its revenue and earnings in the triple-digit range, at least, for the next few years.
However, with the merger most likely to go through next month, the answer will lie with the management of the combined entity. The JDS Uniphase/SDL combination will create a juggernaut that very well could become the 800-pound gorilla in its market.
One caveat: The stock has exploded from around $135 to its present level in the past three weeks or so. If I were an investor looking to establish a position, I'd wait for a pullback. In the very short term, the Fed's moves should dictate what the stock does. (Wondering if Alan's sweating his next move with all the layoffs being announced left, right and center?)
Jay M. Somaney is the portfolio manager of the TSG Tech Fund, a hedge fund focused on the shares of companies involved in the Internet and related technology.
thestreet.com
Price reduction to stimulate growth in what lines?
Jack |
