MRVC featured in 1/16/98 Online Investor:
MRV Communications
The Old Switch-a-roo
January 16, 1998 - A favorite of momentum investors not long ago, MRV Communications (Nasdaq:MRVC) may now be showing up on the radar screen of value investors. That change is largely due to the fourth quarter drubbing of computer networking stocks without any meaningful change in MRV's corporate performance. In other words MRV is still the same small, fast-growing maker of network switching products, but its stock is just a whole lot cheaper.
MRV is a relative small-fry in the computer networking industry, dwarfed by giants like Cisco Systems, 3Com and Ascend. MRV has carved out a profitable niche for itself with leading edge technology in the LAN (Local Area Network) switching market. MRV also has expertise in fiber-optic transmission technology, in fact this was the company's original focus. These LAN switching and fiber-optic products increase the bandwidth and performance of telecom networks, something that is in great demand these days with no sign of a let-up. Enterprises are continuously needing to upgrade the speed of their corporate networks, while telecom service providers are building out and upgrading existing networks to handle soaring traffic.
MRV is a leader in Fast Ethernet switches, which are ten times faster than regular Ethernet. The falling cost of upgrading to Fast Ethernet, thanks to intense price competition among the networking heavyweights, is accelerating the transition and stimulating demand for MRV's Fast Ethernet switches.
Last year MRV was the first in the industry to deliver a product which upgrades Fast Ethernet to handle Gigabit Ethernet transmissions (which are ten times faster than Fast Ethernet). The company also bought a valuable technology by acquiring the assets of Fibronics in 1996, which will enable MRV to produce a backbone switch that enables local-area networks (LANs) to transmit data directly to one another at higher speeds than existing routers. This product is expected to produce substantial revenues.
One major uncertainty facing MRV and its investors, though, is the potential competition from another high speed data transfer technology called Asynchronous Transfer Mode (or ATM). MRV is betting that with Ethernet as the current network standard, companies will find it easier to upgrade to Fast Ethernet and Gigabit Ethernet rather than switch to ATM. ATM backers say their technology is better for video and graphics and doubt that upgrading to Gigabit Ethernet will be any easier than going to ATM.
In general, computer networking experts predict LAN switches will continue to post the most exceptional growth rates within the industry. The foremost driver of demand for networking equipment in the next several years is expected to be upgrading of corporate networks. These intranets have become the strategic platform on which corporate applications are deployed, but their insufficient bandwidth is a glaring issue which will be addressed by upgrades to Fast Ethernet, Gigabit Ethernet, and/or ATM.
With the market for LAN switches exploding and MRV adding market share, analysts project a 40%-45% growth rate for earnings going forward. That's down from an estimated 89% increase in earnings per share for 1997, but a 40% growth rate seems more sustainable for long-term projections.
The share price of MRV peaked at $39.25 in late-September, but in the fourth quarter it plunged in tandem with the tech sector meltdown. Currently at $22.56, MRV is trading at a trailing 12-month P/E of 31.3 and at a forward multiple of 18 times 1998 earnings estimates. Of course, we can't be sure the company will meet those projections of 40%-45% growth, but this stock is trading at a P/E of less than half the EPS growth rate (which is a common benchmark for value investors).
Value investors might still have trouble with a stock that is priced at 3-1/2 times sales, but it's such a fast-growing company (revenue growth was thought to be 80%+ for 1997 and roughly 50% for 1998 and 1999) that the Price/Sales Ratio (PSR) doesn't look terribly excessive at this point.
Return on Equity (ROE) is over 20%, and insiders own 25%. The company has a close relationship with Intel, not only as a customer but also as a shareholder. Intel bought a small stake in MRV in late-1996, 200,000 shares with an option to buy another 500,000. MRV's relationship with Intel and Fujitsu (another big customer for MRV's technology) may help it compete as networking companies consolidate to form end-to-end solutions. |
