Some comments by Lehman about DIGI:
lehman.com
Highlights:
DIGI Rank(Prev): 1-Buy Rank(Curr): 1-Buy Price : $25 3/8 52wk Range: $33-13 Price Target: $39
DSC Communications presents at annual AEA conference providing insight into long-term strategy regarding new products, acquisitions and other business initiatives.
* DSC highlighted a number of new products including broadband Litespan, Fastspan, GSM switching equipment and DWDM products.
* The company also reviewed a number of significant 1997 milestones. These included Ameritech's $300 mln Litespan expansion agreement, Motorola's WLL switch agreement and Bell Atlantic's multi-year procurement valued in excess of $1 bln.
ú Additional comments provided insight into possible alternatives for Airspan, the recent purchase of GSM switch manufacturer, Celcore, and ongoing initiatives in Denmark.
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ú Its recent acquisition of Celcore and a number of key 1997 milestones. On the new product front, the company highlighted a new low capacity version of Litespan (called Fastspan), Litespan for xDSL, and broadband Litespan. The company also provided additional insight into Celcore, the recently acquired manufacturer of GSM switches. During the Q&A period, the company also discussed possible strategic alternatives for Airspan.
Litespan Remains Key Product With 7 mln lines currently in service, Litespan remains a key core product for DSC. The company estimates it now has 14 mln installed slots with 7 mln Litespan lines now in service. In Q&A, the company indicated it expects continued healthy Litespan growth despite the large revenue base this product represents. Recent data indicates 5 mln new phone lines are put into service yearly, with the bulk deployed via NGDLC.
Acquisition of Celcore Expands Product Offerings Last week, DSC announced the acquisition of Celcore, a Tennessee-based manufacturer of low-density GSM switches. The company believes this low density segment of the market will experience strong growth over the next three to five years as new emerging markets are addressed. The total low density GSM switch market is estimated to be approximately $3.8 bln.
1997 Milestones Highlighted The company reviewed a number of key 1997 milestones including its expansion agreement with Ameritech for $300 mln, its multi-year procurement with Bell Atlantic estimated to be valued in excess of $1 bln, and its CDMA switch deployment in Japan with Motorola. All of these milestones were previously announced.
Airspan A Drag On Earnings Airspan, which has been costing DSC approximately $5-8 mln a quarter, remains a drag on company profitability. While the fate of this business is still unclear, management acknowledged a decision to sell, spin-off, partner or shut-down the business will likely be announced by year-end. Any of these possible alternatives would likely be viewed positively by investors. NKT, DSC's Denmark subsidiary, continues to require investment of approximately $10 mln a quarter. Initial profitability is expected in 1H98 as the company ships out of its growing backlog.
Quarterly Shipment Trends Remain Uneven Recent shipment trends remain skewed towards the second half of the quarter with this quarter being no exception. In informal conversation with management, October business trends were unexciting suggesting the fourth quarter may likely shape up to be another heavily backend weighted quarter.
*****Investment Opinion We recommend purchase of DSC Communications based on our belief the company continues to make notable progress on its road to recovery. Revenue growth, margin expansion and an improving order outlook bode well for a strong earnings recovery in 1998.
Litespan has established itself as the de-facto NGDLC standard, wireless switching appears poised to accelerate and NKT provides additional upside earnings potential. Based on a mid-to-upper twenties multiple on our 1998 EPS estimate of $1.40 suggest a target price of $39. |
