S&P 5 star stock PWAV
We see total sales growing 42% in 2005, partly reflecting the $407 million acquisition in May 2004 of LGP Allgon Holding AB, a Swedish equipment supplier. We project 25% sales growth in 2006. We believe PWAV is well positioned to grow its business in wireless antennas and base station equipment, particularly with wireless customers outside the U.S. market. Combined with LGP Allgon, PWAV has a more diversified customer base with less exposure to any one customer.
After reporting better than expected sales in the 2004 fourth quarter, PWAV gave strong financial guidance for the 2005 first quarter, estimating sales of $145 million to $155 million, and issued a full year sales target between $650 million and $690 million. After gross margins improved to 25.5% in the fourth quarter, we see them widening to the 26% to 28% range in 2005 and 2006. PWAV also gave EPS guidance of $0.06 to $0.08 per share for the first quarter and $0.34 to $0.41 for the full year.
We forecast EPS of $0.37 for 2005 and $0.50 for 2006. Our S&P Core Earnings projections are $0.30 in 2005 and $0.44 in 2006, reflecting estimated stock option expense and other one-time adjustments.
With growing confidence in PWAV's outlook as a leading wireless sub-supplier, we believe the company is well positioned to benefit from higher capital spending from wireless carriers. As a sub-supplier, 25% to 30% of PWAV's total sales are from Nokia (NOK: buy, $15) and Nortel Networks (NT: hold, $3), both of which we see expanding market shares in the wireless infrastructure market. About one half of PWAV's total sales are from direct customers.
Risks to our recommendation and target price include weaker than expected merger synergies that put at risk the realization of the company's goal of at least $30 million in operating savings in 2005; increased pricing pressures, leading to narrower gross margins; and an inability to boost market share globally and to manage international operations effectively.
Based on an enterprise value of 1.9X to our 2005 sales per share estimate and our discounted cash flow analysis, we arrive at our 12-month target price of $10. With expected strength in near-term demand, and the stock priced at 15.5X our 2006 EPS estimate, below peers, our recommendation is strong buy |
