Ascend Communications
Stock of the Week
From sfgate.com
TOM ABATE
HEADQUARTERS: Alameda
BUSINESS: Ascend sells networking hardware to Internet service
providers. It acquired Cascade Communications Corp. in June. Cascade
sells network hardware to telephone companies.
BACKGROUND: Ascend shares tumbled last week after the company
warned its third-quarter profits would be 18 to 20 cents per share
instead of the 31 cents most analysts expected. The company issued only
a brief explanation for the shortfall, blaming it on weaker sales in Europe
and Japan. Ascend didn't hold a conference call with analysts, so some
investors are anxious about Ascend's earnings report on Thursday.
Ascend already competes with network vendors like Cisco and 3Com,
and faces potential competition from telephone equipment vendors like
Northern Telecom.
52-WEEK HIGH/LOW: $80.25 (1/23), $30 (9/30) FRIDAY'S
CLOSE: $32.69
--Reported by Tom Abate, Chronicle Staff Writer.
.
UPSIDE:
James Parmelee, analyst, Deutsche Morgan Grenfell Technology Group,
New York
Recommendation: BUY
Investors have to look past the short-term problems. Ascend's chief
problem is making its newest Internet hardware work with 56-kilobit
modem technology. The 56K modem wars have pitted 3Com/U.S.
Robotics against Ascend and a coalition of firms that includes Rockwell
Corp. So far Ascend's camp has been slower to deploy 56K technology.
That has hurt sales to Internet service providers, who generate more than
40 percent of Ascend's revenues. But technical glitches with new Internet
hardware are not unusual. Ascend seems to be solving them quickly.
None of the problems with 56K modem technology are serious enough
to weaken Ascend's long-term relationship as the preferred supplier to
ISPs.
Moreover, Ascend has been doing well at assimilating Cascade.
Cascade's sales to telephone companies seem to be stronger than
expected, helping balance any shortfall in ISP sales. Long-term
fundamentals make Ascend attractive despite its third-quarter stumble.
.
DOWNSIDE:
Amar Senan, analyst, Volpe Brown Whelan, San Francisco.
Recommendation: HOLD
I cut my recommendation from buy to neutral last week after Ascend
preannounced its earnings shortfall. But I am a reluctant bear. I'm not
negative about Ascend's long-term prospects. I simply think that in the
short term its stock will underperform the market.
Ascend's third-quarter troubles can be traced back to glitches in its
implementation of 56K modem technology. Although I am confident
Ascend can solve those technical woes in fairly short order, the company
has another problem.
It has bruised its relationship with the analysts who follow the stock, first
by surprising them with last week's earnings shortfall, and then by not
giving them a chance to ask questions about the extent of the company's
problems.
For these reasons, Ascend's stock is likely to remain an underperformer
until investors regain confidence in management's guidance, and see an
uptick in sales. |
