Article from Smart Money Interactive
- A BARGAIN BASEMENT TECH
STOCK
DAILY SCREEN
Anadigics: A
Bargain
Basement
Tech Stock
INVESTORS HATE
uncertainty -- one
look at the battered
technology sector is
proof enough of
that. The list of
companies issuing
bad news is as long
as it is prestigious:
Altera (ALTR),
Cabletron
Systems (CS),
Western Digital
(WDC) and 3Com
(COMS), to name
a few. As a result,
many other
technology stocks have fallen in sympathy. Investors, it
seems, have yet to divine what the Asian economic crisis
might do to technology companies' earnings, but they aren't
waiting around to find out.
With that in mind, we combed through the technology sector
in search of good companies that have gotten massacred,
their stocks taking a haircut of 30% or more over the past
24 weeks. From there, we tried to identify sectors of the
tech market that have compelling long-term prospects. One
such sector we believe is intact, despite the Asian problem,
is wireless communications.
One of the better beaten-down stocks in the group is
Anadigics Inc. (ANAD), a maker of transmitters for
wireless telephone handsets. The company has a superior
product, strong customers, a somewhat fragmented market
and excellent long-term growth prospects. Moreover,
Anadigics shares, at a recent 29 1/2, are a relative bargain,
having given up roughly 40%, or about $225 million in
market capitalization, of their value since touching their
52-week high of 54 1/4.
The investment thesis for Anadigics is simple: more and more
people are using cellular phones. By the year 2000, experts
predict there will be 400 million wireless telephone
subscribers, up from the 137 million subscribers in 1996,
according to Merrill Lynch. Handset unit sales are expected
to grow at an average of 40% a year, fueled by the migration
from analog to digital services.
It's a complicated market. Do you invest in Qualcom
(QCOM) because you think the digital personal
communications systems (PCS) based on code division
multiple access (CDMA) technology is the best? Or is LM
Ericsson (ERICY) the one, because it makes phones for
both time division multiple access (TDMA) standards and a
European technology called global system mobile (GSM)?
Or is it more wise to invest in the PCS service providers,
such as Omnipoint (OMPT) or Sprint (FON)? Get the
picture?
Anadigics represents a simple way to make money on this
trend without having to choose which service provider and
system manufacturer will prosper. Based in Warren, N.J.,
Anadigics makes power amplifiers used in telephone
handsets based on all the major standards, from analog to
digital PCS. It's an integrated circuit, or semiconductor,
made from gallium arsenide instead of the more common
silicon. Amplifier chips made of gallium arsenide can handle
the high frequency and broader bandwidths of digital
communications better than silicon. They also throw off less
heat, offer better performance than cheaper discrete
components containing 30 to 50 more chips, and use less
power, which conserves battery life. Plus, Anadigics's
integrated circuits are used in a variety of bandwidth-hogging
communications equipment, such as cable TV set top boxes,
digital TV satellite dishes and fiber optic systems.
But two-thirds of its revenue -- which is expected to reach
$140 million in 1998, up from $51 million in 1995 -- comes
from telephone handset amplifiers. Anadigics's biggest
customers include Qualcom, which is now rolling out its
CDMA handsets; Ericsson, which makes TDMA and GSM
phones; and Nokia (NOK/A), which also makes TDMA
and GSM phones. While CDMA is the hot product now,
analysts expect a dual-band phone that is capable of
handling either digital or analog signals to keep sales growing
at 30% a year or more for the next few years. Wall Street
expects Anadigics's earnings to reach about $0.99 a share in
1997 (up from $0.55 a share last year, fully taxed) and then
grow 25% to $1.24 in 1998. A further sign of health:
Operating profit margins are forecast to reach 19.7% this
year (ending Dec. 31), up from 14% in 1996.
Though Anadigics can call itself a leader in this market, it
controls only 18% of the wireless amplifier chip market, with
Triquint (TQNT) and other small players accounting for just
1%, says Dale Pfau of CIBC Oppenheimer. Most of the
market is served by the phone makers themselves, who still
buy cheap groups of chips to perform the task of one of
Anadigics's chips. But with the rise of digital phone services,
the migration to a gallium arsenide chip is inevitable, analysts
say.
While that may be so, Motorola (MOT) or some other
large chip maker could always decide to go after this
profitable segment aggressively, putting pressure on prices.
And analysts claim that gallium is difficult to use, and,
anyway, Ericsson and others save money by farming out the
chip making.
So why did the company get crushed in the recent tech
selloff? While Anadigics has only 10% to 15% direct
exposure to Asia, Ericsson, its largest customer, has much
more. And Ericsson may account for as much as 30% of
Anadigics's sales in 1997, according to Needham & Co.
analyst Sandy Harrison.
Ericsson and Nokia shares were downgraded to Neutral by
Merrill Lynch, which argued that Ericsson, because it
grosses 27% of its sales in Asia, and Nokia, which gets 22%
there, will suffer from that region's "deteriorating" economy.
Furthermore, VLSI Technology (VLSI), which supplies
Ericsson with electronic phone parts, warned of sluggish
first-quarter booking last week.
But it's too early to tell whether Ericsson's rumored
slowdown in handset sales in Asia will affect Anadigics.
Anadigics's chief financial officer, John Lyons -- who
declined to be interviewed for this story, citing the
company's quiet period -- told the Dow Jones New Service
that he saw no change or softness in the wireless market.
Timothy Kellis of Rauscher Pierce Refsnes isn't trimming his
1998 earnings-per-share estimates of $1.28 for a very good
reason: "Remember, wireless phones are crucial in Asia," he
says. "Asia doesn't have wires laid, so cell phones are the
way they communicate."
-- By David Geracioti |
