TO ALL--Report after the close.. Hopefully will help tommorrow!!
NewsWare Timestamp: 06/23 16:19
(FIRST CALL) FBCO: PM Meeting: PAIR: Growth At A Very Reasonable Price
FBCO: PM Meeting: PAIR: Growth At A Very Reasonable Price FBC
CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research-Americas
Industry: Telecommunications Equipment
Michael T. Schmidt Ph.D., CFA-212/325-2861-mschmidt@csfbg.csfb.com
Mark H. Rose-212/325-2413 -mrose@csfbg.csfb.com
BUY
PairGain-(PAIR)
Summary
Incorporating lower expected prices for HDSL in our model to
reduce revenue forecast by 10% and EPS by 5%. Market demand
for T1 lines, which drives HDSL, appears strong and we expect
PairGain to remain a market leader. New PGFlex product could
add incremental revenues by year end. Five year annual growth
forecast remains 50%. We think PAIR represents growth at a
very reasonable price. Maintain Buy.
Price Target Mkt.Value 52-Week
6/20/971 (12 Mo.) Div. Yield (MM) Price Range
$18 $50 None $1,359.0 43 1/4-14 1/2
Annual Prev. Abs. Rel. EBITDA/
EPS EPS P/E P/E Share
12/98E $0.95 $1.00 18.9X 90% $1.35
12/97E 0.72 0.76 25.0 113% 1.00
12/96A 0.49A 36.7 154% 0.80
March June Sept. Dec. FY End
1998E $0.20A $0.23 $0.24 $0.28 Dec. 31
1997E 0.19A 0.17 0.17 0.19
1996A 0.09 0.11 0.12 0.17
Total Debt (3/97) 0
Book Value/Share (3/97) $2.40
Debt/Total Capital (3/97) 0%
Common Shares 75.5 mil.
Est. 5-Yr. EPS Growth 50%
Est. 5-Yr. Div. Growth NA
1On 6/20/97 DJIA closed at 7796.51 and S&P Industrials at
1054.79.
All items adjusted for a 2:1 split in Dec. 1996, and exclude
unusual items.
PairGain has an estimated 70% market share for HDSL, which
allows high-speed data over ordinary copper telephone wires and
is also addressing the residential market.
Reduced estimates forecast 50% top and bottom line growth in
1997 and 35% growth in 1998.
We are incorporating lower price assumptions for HDSL
equipment into our estimates for PairGain. We estimate that
about 75% of the company's current revenues are from its
HiGain HDSL units, and it is widely estimated that PairGain
has about 70% marketshare for HDSL used to deliver T1 lines.
During the current quarter, one of PairGain's significant
competitors launched a price war that appears to have put HDSL
units on a 30-35% price decline from a more typical level of
about 20% declines. Declining component costs have allowed
the industry to absorb the 20% price declines, and over time
we expect PairGain and its competitors to absorb the current
price cuts.
In looking at our model with the assumption of lower prices
per unit, we need to determine whether lower HDSL prices will
drive greater unit demand. We believe lower T1 service costs
would drive increased demand as more Internet servers and
businesses would probably get the faster data services offered
by T1. However, we do not believe that the major carriers
have available personnel or other resources to install T1
lines faster than an estimated 40% growth currently in the
market. Therefore, we do not expect lower HDSL prices to the
carriers be passed through as lower T1 costs to end customers.
In our model then, if we do not change our unit assumptions,
but we lower our price assumptions, we must lower our total
revenue forecast by about 10% to reflect the current outlook.
We do not expect PairGain to have a significant loss of market
share for HDSL.
We believe the current quarter has likely been slightly
impacted by purchasing reviews of the new prices as well as
new product responses, such as PairGain's recently announced
lower feature lower price product. However, we expect it will
be the third quarter before the actual impact of the lower
prices is reflected in PairGain's income statement.
Therefore, based on current quarter uncertainty, we are
trimming our estimates for June quarter revenues to $72
million -- up 52% over the prior year -- from $77 million.
PairGain typically books revenues smoothly throughout a
quarter, allowing it good visibility to match expense growth
with revenue growth. Therefore, we are only modestly reducing
our earnings estimate to $0.17 from $0.19, compared to $0.11
the prior year.
For the third quarter we are reducing our revenue forecast
from $82 million to $74 million and our EPS estimate to $0.17
from $0.19, compared to $0.12 the prior year. For the fourth
quarter we are reducing our revenue estimate to $85 million
from $92 million and our EPS to $0.19 from $0.20, compared to
$0.17 the prior year. The fourth quarter could benefit from a
new product, PGFlex, that we expect to be approved by one or
more RBOCs in the next month or two. Our full-year estimate
is now revenues of $301 million and EPS of $0.72, reduced from
revenues of $321 million and EPS of $0.76. For 1998, we are
reducing our revenue forecast to $412 million from $451
million and our earnings estimate to $0.95 per share from
$1.00.
We are maintaining our Buy rating on PAIR because we believe
that price competition is likely to have only the 5% earnings
impact in 1998 reflected in our model with little long-term
impact. We expect PairGain can continue to lead one of the
fastest growing segments of telecom equipment, namely products
to upgrade the installed base of copper infrastructure to
transport high-speed digital data. We have confidence in
management's ability to continue to show strong growth in its
market. The current price reductions have been outside of
management's control, and we believe it is responding in the
best way for long-term growth, as it did in 1994 when it also
faced strong price competition. Near-term product
announcements such as the PGFlex, as well as the emergence of
the small business/residential xDSL market should be positive
catalysts for the stock in the coming months as they allow
incremental potential revenues and broaden the company's
product line. With the stock trading at a P/E of less than 19
times our reduced 1998 estimate, we think PairGain's long-term
opportunity is undervalued. Therefore, we maintain our Buy
rating while cautioning that the Street consensus is likely to
be further reduced toward our current estimates.
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