From GS: We are downgrading Tellabs to an Underperform rating from an In-Line rating, based
solely on valuation. The stock has run 90% in the past 5 weeks, vs. S&P 500 up 9%. To
justify yesterday's closing price of $8.60, we estimate Tellabs would have to see 40%+
CAGR in sales for the next 10 years with a 25% operating margin. To justify the price on
a FV/Sales multiple, sales would have to double in the next two years. On a normalized
margin, the stock's P/E is 21x for a company that has a long- term growth rate that is mid
to high single digits. Backing out the cash, TLAB is trading at a P/E of 15x normalized
earnings. We believe that fair value for TLAB stock is in the $4 - $6 per share range based
on 0.7x - 1.0x EV/sales, a DCF analysis and a normalized P/E of 10x.
Despite this valuation call on TLAB shares, we continue to believe that Tellabs remains
differentiated from many of its commtech peers. With its strong balance sheet (approx.
$1B in cash, or $2.42 per share) and neutral to positive cash flow performance, we
continue to favor TLAB over other carrier-focused vendors, namely Lucent and Nortel.
Further, the company's proactive restructuring efforts appear to be solidly on track and
management seems well in-tune with the near-term challenges it faces. We are
maintaining our 4Q02 and 2003 rev/EPS estimates of $277M/($0.04) and $1.1B/($0.09),
and believe that the company will exit 2002 with $978 million in cash ($2.37 per share).
Additionally, we believe that Tellabs continues to make progress in gaining traction with
its new product lines, in particular with the 6400, which shipped to 8 new customers in 3Q02. |
