Here is the text from the SmartMoney article:
EVERYBODY WANTS BETTER, faster, more reliable
phone service. And we mean everybody, from the
lowliest Internet surfer to the titans of long distance.
Thus, if you've got equipment that can make telecom
systems work better, our guess is that you'll have little
trouble selling it, regardless of where we are in the
economic cycle.
Our top choice here, DSC Communications (DIGI), is
in good shape to capture its share of the bounty. The
Wall Street consensus is that the Plano, Tex., company
should grow at 21% a year over the next three to five
years.
So why's such an outperforming company trading at a
P/E of 16.6, while large-cap competitors such as
Northern Telecom (NT) and Lucent Technologies
(LU), which sport similar growth rates, command
premiums of 29 and 28 times earnings? Turns out DSC
was caught in the movement to open up competition
between long distance and local phone companies. To
fight those wars, telephone carriers have purchased
switches -- products that track and route caller traffic --
with features that can handle local calls as well as long
distance ones. In the past, DSC's business focused on
making switches that primarily handled long distance
calling traffic. So while the company enjoyed revenue
growth of 36%, 37% and 38% between 1993 and
1995, with few local-service options on its switches,
revenue in 1996 fell 3%, to $1.4 billion.
The stock tumbled to a low of 16. While the price has
recently rebounded to 23, we still don't think it reflects
three big positive developments. First, the company has
been developing a new switching system with many of
the local-calling options that are now in such hot
demand. More important, DSC has launched a new
generation of high-speed, fiber-optic access products
and started aggressively courting foreign telecom
companies.
DSC's access product -- Litespan 2000 -- can carry
voice, video and broadband traffic. But perhaps most
important, it redirects Internet traffic off old, local,
low-speed phone lines, where it bogs down everyone's
service, and on to high-speed lines, relieving the
congestion. GTE is currently testing the system as a
possible network standard. It's also being used by
Ameritech (AIT), Bell Atlantic (BEL), BellSouth
(BLS) and US West (USW). Alkesh Shah, a telecom
analyst at Morgan Stanley, figures revenue in the access
division accounted for 39% of the company's total sales
in the third quarter of 1997 -- up from 31% in 1996.
The other driver is international demand, which is
surging. In 1997's third quarter, DSC's worldwide sales
increased to 28% of total revenue from 20% the year
before, mostly due to strong demand for the Litespan
system and cellular switches in Europe. DSC has a
Danish division that makes optical transmission products,
and that subsidiary is expected to post positive earnings
early this year after three years of red ink.
I hope '98 is as promising as it sounds!
Eric B. |
