Ascend Strong After Soothing Words at Solly Conference
9/9/97 6:42 PM ET
Old news is great news
So sang investors after a conservative but
unsurprising speech from Ascend
(ASND:Nasdaq) execs at a Salomon Brothers
analyst conference in New York on Tuesday
afternoon. Ascend indicated that it still
doesn't know if European business will meet
expectations in the quarter ending Sept. 30,
according to Patrick Adams, manager of the
Berger 100 fund, whose analysts were in
attendance.
Adams' reading: No problem, we already know
that.
"The fear was that they were going to
preannounce" disappointing profits and seal
their fate, says Adams. Instead, Ascend
reiterated cautious statements that
investors had digested weeks ago. "It's
already in the stock," Adams says, and
finally the stock was ready to rise again.
Shares of Ascend, which dipped in early
trading, lifted in the afternoon to close up
2 7/16 at 42 9/16 on heavy volume. Cisco
(CSCO:Nasdaq) didn't quite make up its mind,
but ended the day a bit higher. Another
piece of bullish news fanned 3Com
(COMS:Nasdaq), which added 3 7/16 to end at
51 5/8. That smidgen came from Intel
(INTC:Nasdaq). When the chip maker on Monday
unveiled a new line of adapter cards at the
same old price, investors perceived a
respite from the 3Com-Intel price wars.
As for Ascend, somehow its VP, Bernie
Schneider, convinced investors to be patient
during his speech Tuesday at the Salomon
gathering. Berger's Adams, for one, finds
the long-term outlook as robust as ever
(short-term, he expects Ascend to earn 33
cents per share in the current quarter and
to keep its margins intact). Berger 100 owns
550,000 shares of Ascend, up a bit recently,
and Adams says he's watching like a hawk for
the moment to buy a lot more.
Ascend's investors have weathered a tough
August, as Solly's analyst Peter Swartz
aptly affirmed in a research note on Sept.
2. Citing sluggish business in Europe,
Swartz trimmed his earnings estimates from
34 cents per share to 32 cents per share for
the quarter ending Sept. 30. He is more
conservative than the Street -- the First
Call consensus has edged downward from 36
cents per share to 34 cents per share in the
last month. Recovery, however, brightens the
horizon.
"For investors willing to look past Ascend's
near-term execution issues, we see much more
appreciation potential over the next 12
months than downside risk," wrote Swartz,
who maintained his buy rating and set a
price target of 55. He added that the
Cascade unit, acquired on June 30, should
re-energize sales late this year or early
next year with new switching products.
Salomon has performed no underwriting for
Ascend or Cascade.
Another pro who seems willing to wait is
money manager John Leo at Northern Trust.
"We're looking for signs of accelerating
demand," says Leo, whose Northern Technology
fund owns shares of Ascend, Cisco and 3Com.
Leo has kept his portfolio weightings in
those stocks largely unchanged in recent
sessions. Still, he's looking for
indications that phone carriers and other
companies (especially those overseas) have
picked up their spending on infrastructure.
And while executives seldom enjoy disclosing
it, Leo wants to know that profit margins
are intact.
If and when revenue stability returns,
Ascend will run at a discount. The stock
trades at 32 times earnings for the trailing
four quarters, if significant acquisition
charges are disregarded. Pretty cheap, given
the 112% growth rate in that period. Shares
run at 21 times projected 1998 earnings,
while analysts predict growth of 38%.
The recent malaise took hold of Ascend and
other networkers rather abruptly. Execs made
an upbeat appearance at a July 29 conference
in Santa Clara, Calif. (reported in
TheStreet.com). Then the good news paused
for a while. On Aug. 11 the company stated
in a Securities and Exchange Commission
filing that sales in July were
proportionally low (also reported in
TheStreet.com) -- not necessarily a negative
sign in itself, but enough to feed the
bears. General anxiety about the sector
helped beat Ascend from a July 31 high of 54
3/8 to 41 3/8 on Aug. 28.
Since that trough Ascend's stock has ebbed
and flowed, closing down 7/16 at 40 3/16 on
Monday. A Dow Jones report on Monday
afternoon that WorldCom's (WCOM:Nasdaq)
UUNet division will accelerate its purchases
of Ascend's gear failed to nurse the stock.
While Ascend's quarter won't wind down for a
few weeks, some hard evidence of the
sector's health will surface soon. 3Com
expects to report earnings for the quarter
ended Aug. 31 after the markets close on
Sept. 23; Cabletron (CS:NYSE) is tentatively
scheduled to release its numbers on the
morning of Sept. 22.
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