Upgrading to Strong Buy from Buy
Robertson Stephens, Inc.
Arun Veerappan
February 15, 2001
“Vitesse presented at the Robertson Stephens’s conference yesterday and reiterated its guidance for 10-15% Q-Q revenue growth in the March quarter,” said Veerappan. “In addition, the company indicated that gross profitability metrics should continue to improve and that the balance sheet (specifically DSOs) should improve as well. It is our view that Vitesse has garnered a strong positioning in the switch fabric market. This is a still nascent market for the merchant vendor community and is scheduled to see a wave of outsourcing by system OEMs in 2H:C01, in our view. We believe that Vitesse has a significant share of this market. We also believe that the move to higher data rate transmission systems increases the need for error correction mechanisms in systems. We believe that demand for forward error correction circuitry will increase substantially by 2H:C01 and we further believe that Vitesse has garnered a significant presence in this fast growing market as well. We believe that these two revenue streams together comprised less than 5% of F00 revenues and can likely comprise upwards of 20% of the company’s revenue base by F01. Finally, we believe that on a valuation basis, Vitesse is trading at 35.6x our C02 EPS estimates of $1.83, which is below the peer group average of 38.4x C02 EPS estimates. As Vitesse executes through the first half of the year and as investors begin to appreciate the opportunities that lie ahead of the company in the switch fabric and forward error correction markets, we believe that multiples associated with Vitesse stock can expand to match the company’s growth rate for the coming two years, which, in our view, is in the 50%+ range. We are therefore using a 50x multiple to our C02 EPS estimate for Vitesse of $1.83 and arriving at a $91 price target by year end which represents a 40% appreciation potential from current levels. Given our above stated beliefs, we are upgrading Vitesse stock from a Buy to a Strong Buy.” |
