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Sycamore Deal Looks Good
Posted Thu Apr 13, 12:04 pm ET
by David Weissman, CFA
Sycamore Networks (SCMR), a leading provider of optical switching equipment, announced plans on April 12th to acquire Eastern Research, a subsidiary of Allen Organ. We expect the deal to consummate over the next two quarters, which will provide the company the possibility of recording combined company revenues for FY2007 (beginning July 2006). Cross-selling and no product overlap should make the deal accretive with positive incremental earnings.
SCMR continues to maintain one of the strongest balance sheets in the telecom equipment industry. Increased Internet traffic, and fiber-to-the-home initiatives with triple-play (Voice, Video, and Data) offerings proliferating to the consumer market, should translate to additional spending by large carriers as they address higher bandwidth requirements. Recent contract wins (U.S. Government and Sprint), along with nearly $966 million (approx. $3.45/sh.) in net cash are compelling reasons for our continued Buy rating.
We feel that an effective way to view Sycamore’s adjusted valuation is based on an adjusted P/E comparison, considering the magnitude of their net cash position. We use our estimate for 2006 P/E at 36.5x, but on a net cash basis (removing 3.45/share of their cash of the stock valuation), the multiple becomes reasonable at 10x 2006 earnings. Our $5.40 price target is based on net of cash 2006 forward P/E multiple of 15x, closer to the P/E multiple of its peer basis. Time and patience continue to be essential, but we anticipate that the company’s financial, technological and business foundation will be rewarded with higher valuations in the near future. |
