| |
To all,
In light of the recent discussion between George Young (whose
cautious evaluation of MRVC's relative small size seems
very prudent) and Tae Kim (whose analysis of MRVC's technical
prowess and of management seems accurate), I am posting here
what I recently emailed to one of our thread colleagues.
Personally, the realistic downside risk is MRVC being bought
out by a big corporation. The realistic upside risk is MRVC continuing to grow rapidly and UNSEEN (if George Young's
friends' observation is accurate) by major networking
companies. Wal-Mart was able to grow because it had
great management (Sam Walton), was unseen by K-Mart
for decades and because Wal-Mart concentrated on
small towns ignored by K-Mart.
Regards,
Haeoh
Long on MRVC
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Gyzniwa,
Sorry it took me a while to prepare a definitive answer to your recent
inquiry about MRV. Here it is.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
I refer you to the June 96 issue of Worth, page 76. In this article,
the author (presumably a reporter) goes on a search for the next
Microsoft with three basic requirements:
1. Monopoly or near-monopoly in a field (like Microsoft...)
2. Paradigm shift (or anything that empowers people to do
things in a new way (like Microsoft...)
3. The company should be in a position to take advantage of
the above two, namely a good management, and luck (like
Microsoft...)
Along the way, he came across Cybercash, Geoworks, two biotech
companies, and MRV Communications. The following is a direct excerpt
from the article:
......
Switching companies such as Cisco Systems and Ascend Communications,
with market caps of $26 billion and $6 billion, respectively, are
already well known to investors. But Lamoreaux (an analyst) mentioned a
small firm ($300 million market cap) founded by Shlomo Margalit and Zeev
Rav-Noy. This eight-year-old company, MRV Communications, makes
ethernet switches that run at 100 megabits per second versus the old
standard of 10 megabits per second.
Aharon Orlansky at Prefereed Technology, a New York City brokerage firm,
is by all accounts the man to talk to about MRV. Trouble is, he opened
our conversation as follows: "First of all, to say that they are the
next Microsoft is not true."
I hate when that happens. Orlansky indicated that MRV isn't out to
dominate data networking in the way that Microsoft dominates software.
But before I could hang up, he added that MRV does manufacture the best
100-megabit switches on the market. And it got to that market quickly
enough to beat out much bigger competitors like 3Com and Bay Networks.
What's more, MRV is a low-cost producer.
Great technology and low costs aren't enogh to dominate a market these
days, but MRV has also taken a page out of the Microsoft manual by
cutting a deal to supply switches to industry giant Intel. Now the rest
of the industry might think about chaniging to MRV.
There's also MRV's fiberoptic technology, which helps convert electrical
power into light for transmission over high-speed fiberoptic cable.
Together, the fiberoptic and ethernet switching markets will account for
some $6 billion in sales in 1996. Unfortunately, MRV's share of those
markets is less than 2 percent. And while that share will probably
grow, I concluded that Orlansky was right: MRV is not the next
Microsoft.
That said, MRV might be a pretty good investment. The company has no
debt and $9.1 million in cash. Orlansky figures sales would grow 60 to
100 percent annulally over the next three years and hit at least $400
million by 2000. He thought the company could earn $3.50 a share,
justifying a stock price of $125.
That's a potential return of 290 percent in four years. No Microsoft,
but it's better than a poke in the eye with a sharp stick.
......
......
August 96 issue of Individual Investor, page 37, recommends
accumulating:
All this turmoil (the recent Cabot Market Letter fiasco)
presents an excellent buying opportunity. In the low $40's
(pre-split), MRV is trading at about 20 times next year's expected
earnings of $2
......
......
The following is my report to my investment club in February 96:
......
MRV was founded by two Israeli professors at Caltech in 1988 and went
public in 1992 at $5 and is currently at $38 (pre-3 for 2 and pre-2 for
1 split). I started following this company when it received a favorable
mention in the IBD and Individual Investors. It is a small cap company
($160 million) in two fast-growing sectors of high-tech industry,
fiberoptics and LAN switches, estimated at $2 billion and $1 billion,
respectively, and expected to grow 30-40% and 80-120 % annually,
respectively. MRV makes laser diodes and LED's that convert electronic
signals into light pulses to travel over fiberoptic cables and back
into electronic signals at the other end. MRV also makes switches that
help manage data transmission for Ethernet and Token Ring LAN's thru its
wholly owned subsidiary NBase Communications, which is the
faster-growing part of MRV's business.
Since its founding, MRV's revenues and EPS have grown at an average of
100% annually to $35 million and $.63 for 1995 (expected), although a
net loss of $.28 is expected due to a one-time charge for the recent
acquisition of two switch-making companies enabling MRV to offer
switches for both Ethernet and Token Ring LAN's. Expected for 1996 are
$65 million and $1.06, resulting in MRV shares doubling and some in 1995
and PE of 35-40 against 1996 income. The company has no debt, 40% is
owned by management (15% earch by two founding members, Chairman and
Chief Technical Officer, and 10% by Noam Lotan, CEO) and only 3% is
owned by institutional investors.
Despite its small size in comparison to Cisco Systems, 3Com , and Bay
Networks, it has repeatedly beat them in bringing out faster and cheaper
switches to the market, which Lotan attributes to its small-sized
nimbleness and its strong connection to the brain reserve of Caltech.
It is also developing its own niche market by combining its two areas of
expertise by marketing switches that have fiberoptic connection ports,
which will be necessary for future fiberoptic networks.
In summary, the upside potentials are:
1. MRV is in fastest-growing areas of high-tech industry,
telecommunications, which is and will be going thru explosive growth
due to the Internet, and spread of corporate intranets. Given such
growth prospects, CEO Lotan's plans for MRV to become a $200 million
sales company by 2000 seem to be an understatement.
2. MRV's management seems well-rounded with two scientists as founding
members and Lotan, who is trained in electronic engineering but also
has an MBA and has worked for the Israeli defense R & D,
Hewlett-Packard, and a fiberoptic company, ie., Lotan is more of a
marketing man than an egghead scientist.
Downside risks are:
1. Since MRV sells its fiberoptic and switch products to only a few
OEM's such as Cisco and GE, if its customers switch to other
products, MRV's sales will be seriously hurt.
2. MRV's competitors are big and strong and will eventually take MRV
seriously as it keeps growing. However, a similar company was
bought out by Compaq at seven times sales, which gives a potential
buy-out price of $65-$70/share for MRV ($65 million for 1996 x 7,
divided by 6.7 million outstanding shares = $67/share) - (these
numbers are outdated by now).
I recommended a buy for MRV's long-term growth potential, well-rounded
management and its hopefully limited down-side risk of being bought out
by Cisco or other networking giants. My investment club agreed to buy
MRV.
Well, hope this helps. Sorry I don't have the reference info for the
original Individual Investor issue that listed 25 magic stocks for 1996,
which MRV was originally described in.
Let me know if I can be of service again.
Regards,
Haeoh
Phila., PA |
|
