Posted the wrong PAIR article:
PAIR: Raising estimates; the worst is probably over for the company.
01:37pm EDT 17-Sep-97 Robertson Stephens & Co. (Paul Johnson, CFA (212) 407-04
Robertson Stephens & Co. Robertson Stephens & Co.
PairGain Technologies, Inc. PAIR $28.13 9/17/97
Industry: Networking
Paul Johnson, CFA 212 407 0415
Change:Yes/No Was Is Ara Mizrakjian 212 407 0406
...Rating: No BUY
...EPS 1996:Actual $0.49 FY DEC 1996A 1997E 1998E
...EPS 1997E: Yes $0.62 $0.65 EPS: 1Q $0.09 $0.19 $0.17
...EPS 1998E: Yes $0.70 $0.75 2Q $0.11 $0.16 $0.18
52-Week Range: $43-15 3Q $0.12 $0.15E $0.19
Shares Outstanding(MM) 74.7 4Q $0.17 $0.16 $0.21
Market Cap ($MM) $2,102 Year $0.49 $0.65 $0.75
Avg Daily Trading Vol (000) 3,997 P/E 58.0x 43.4x 37.6x
6/97 Bk Value/Sh $2.68
6/97 Tot Debt/Tot Cap 0%
LTM ROIC: 95% Revs($M): 1996A 1997E 1998E
Price/Book Value: 10.5x 1Q $40.5 $70.7 $76.9
EBITD/Sh: NM 2Q $47.2 $66.4 $83.3
Div/Yld: $0.00 NM 3Q $54.6 $67.2E $90.2
3-Yr Sec Growth Rate: 30% 4Q $63.1 $70.8 $99.3
Year $205.4 $275.1 $349.6
MktCap/Rev 764% 601%
Raising estimates; the worst is probably over for the company.
KEY POINTS:
* We are raising our estimates for PairGain to reflect strong initial demand for
PG Flex, the company's new small subscriber product line, and a slowing in the
erosion in pricing of its flagship HighGain products. We are not the first to
report on these improvements. Nevertheless, visibility appears to be
increasing, albeit modestly.
* In our discussions with PairGain's management it appears that initial demand
for the new PG Flex product line is a bit stronger than we had been forecasting,
although management has been optimistic about the market potential of this
product area for some time. We are now estimating PG Flex revenues at roughly
$5 million in the quarter, up from a previous estimate of roughly $2 million.
Although pricing pressure remains in the market for HighGain (HSDL line cards),
we belive price erosion in the quarter appears to be less severe than expected
and unit demand is running a bit above plan. As a result, revenue contribution
is a bit higher than we had expected.
SUMMARY:
Our new estimates are as follows; we believe our estimates to be conservative:
Table 1 (in millions, except per share)
1996A 1997E 1998E
New
Revenues (MM)$205.4 $275.1 $349.6
EPS $0.49 $0.65 $0.75
Old
Revenues (MM) $267.2 $336.7
EPS $0.62 $0.70
ACTION NOW: PairGain is rated BUY.
REASONS FOR RECOMMENDATION:
* We believe there is opportunity for upside surprise in revenues and earnings
as the markets for advanced signal processing equipment aimed at traditional
telephony applications begin to accelerate. We now see PairGain serving three
markets:
* Telco infrastructure. Carriers have been using PairGain HDSL products to
deploy new T-1 lines for traditional voice and data applications as a
cost-effective alternative to traditional repeater-based equipment. Revenues
from this market were one of the primary drivers of growth in PairGain's
revenues during 1994, 1995 and 1996.
* Corporate services. As corporate needs for telecommunications bandwidth and
circuit capacity has been accelerating during the past few years, telcos have
had to respond by deploying and tariffing services such as frame relay and
PRI/T-1. We have begun to see demand for HDSL-based products as the key
technology used to deploy these services to corporations.
* Small Business/Residential. PairGain's newest market, the small business and
SOHO markets, represents a great opportunity for HDSL-based products in the 1997
to 1998 time frame, in our view. With products such as the Megabit Modem and
the EtherPhone, PairGain can offer 700Kb+ data speed plus a separate POTS line
on existing copper lines. We believe that these products represent an
attractive alternative to other "high-speed" services and could add materially
to the company's 1997 and 1998 revenue growth.
* PairGain is leading the market for telephony equipment that can leverage the
billions of dollars of investment in copper transmission lines. PairGain's
products allow telecom carriers to upgrade existing copper transmission lines to
carry high-speed, fiber-optic-quality traffic. By using the PairGain products,
telecom carriers can offer customers advanced services without being forced to
completely upgrade their entire transmission network.
* PairGain applies sophisticated signal processing technology and systems level
designs (high software content) to build products that enhance the performance
capability of the existing investment in copper based transmission systems and
to develop and design new telco transmission products for new markets.
COMPANY DESCRIPTION: PairGain is a leading supplier of telephony equipment used
by carriers to dramatically increase the performance and reliability of
traditional copper-based, twisted-pair wiring. Extending high-speed digital
signals to the "last mile", leveraging the huge investment of existing installed
copper wire, the company utilizes a signal processing technique called HDSL to
achieve high-speeds and fiber-optic quality over standard copper wiring.
PairGain is the leading supplier of HDSL-based systems.
INVESTMENT RISKS: Among the risks are price competition and that telephone
carriers typically move slowly.
* Price competition: Although PairGain has emerged as the clear market leader
and we believe is the low cost producer in the market, other vendors have made
sizable investments in their HDSL technology. Since we believe PairGain has a
considerable cost advantage over any new vendor to enter the market, in our
view, market share could only be gained at a considerable financial cost to a
new market challenger.
* Telephone carriers move slowly: Although the market for HDSL appears to be
accelerating, the telco carriers are notoriously slow at adopting new
technologies. They operate at a different pace than other companies.
Therefore, although competition within the telephone industry is forcing the
traditional carriers to move more quickly and invest in new technologies such as
HDSL, there remains the risk that adoption of HDSL could slow at some point
because of the inertia of this industry.
Robertson, Stephens & Company maintains a market in the shares of PairGain and
has been a managing or comanaging underwriter for PairGain within the past three
years.
FOR ADDITIONAL INFORMATION, CALL YOUR ROBERTSON, STEPHENS & CO. REPRESENTATIVE
AT (415) 781-9700. |
