2/7/98 Fin. Post 25
1998 WL 7190780
The Financial Post
(c) Copyright 1998 The Financial Post Company
Saturday, February 7, 1998
2, Investing
Hot Stock
Investors in quandary over $11B Newbridge tailspin
Jill Vardy, Technology Reporter
After witnessing the largest drop in market capitalization in Canadian
history, investors in Newbridge Networks Corp. hang on the horns of a
dilemma all too familiar to investors in technology companies.
Do they bail out now that the stock is hovering around its 52-week
low? Or do they hang in, hoping the company is telling the truth when it
says it will recover?
Newbridge stock (NNC/TSE) has plummeted from a intraday high of $95
reached on the Toronto Stock Exchange last October to a bottom of $27.50
on Wednesday.
It slowly crept up on Thursday as brave investors tested the floor of
the stock and it again rose 10 cents to close at $29.35 Friday. In New
York, the stock (NN/NYSE) rose 3/16 Friday to close at US$20 1/2.
But the fallout from this week's terrible financial news, coupled with
two previous missed quarterly targets has resulted in an $11-billion
decline in Newbridge's market cap. To put that into perspective, the
plunge is more than three times as large as Bre-X Minerals Ltd.'s loss
of share value.
A spate of bad news from Newbridge has prompted a flurry of downgrades
to the company's stock.
Analysts were stunned when the company said Monday it reaped net
income of just US7 cents a share in its third quarter ended Feb. 1 - far
below the Street's consensus expectations of US23 cents a share. Revenue
was almost $100 million below forecasts.
Newbridge said the shortfall was the result of surprisingly poor sales
of its older time-division multiplexing (TDM) products in Europe, Asia
and Latin America. Sales of those high-margin products sank 30% in the
three months ended Feb. 1.
Nor are they expected to recover. Newbridge officials say TDM sales
will likely fall 15% in its next fiscal year.
Newbridge is still struggling, meanwhile, to make a silk purse out of
its UBNetworks division, which it bought at the end of 1996 as an entry
into the market for local area network communications equipment. So far,
the venture has meant little but headaches and missed quarters for
Newbridge, prompting the company to lay off 282 UB workers last month.
The total writedown associated with UB will be unveiled Feb. 24 when
Newbridge reports its final numbers for the third quarter.
A recent alliance with U.S.-based LAN expert 3Com Corp. will now be
Newbridge's key to the LAN market. But that relationship would not
likely result in revenue for Newbridge for several quarters, analysts
say.
Newbridge executives cling to the hope that its packet switching
products for wide area telecommunications networks will continue to reap
the revenue growth the firm has enjoyed. Company officials assured
analysts that sales of the newest asynchronous transfer mode (ATM)
switches in that line are still showing growth rates of about 60%.
However, that was not enough for shareholders, prompting the
unprecedented bailout from Newbridge stock. On Tuesday alone, almost
11.4 million shares were traded.
Goldman Sachs & Co. removed the stock from its recommended list and
lowered the company's fiscal 1998 earnings estimate to US65 cents a
share, and its fiscal 1999 forecast to US$1 a share.
J.P. Morgan Securities also downgraded the stock to "long-term buy"
from "buy" and Cowen & Co. cut its rating to "buy" from "strong buy".
"While ATM switch revenue is still growing well, the steep falloff in
the TDM business will dampen revenue and earnings permanently," said
Goldman analyst Mary Henry.
Analyst Rob MacLellan, of SBC Warburg Dillon Read Inc., also cut his
fiscal 1998 earnings estimate to US65 cents a share. For 1999 he is
forecasting earnings of US81 cents a share, just over half his previous
estimate of US$1.57.
MacLellan maintained his "hold" rating on the stock but cautioned
investors who do not hold shares to "not go near it" until more details
about the third quarter and future prospects for ATM sales are known. He
is forecasting only 45% growth in that segment of Newbridge's product
line.
Still, a hardy few professionals think now is the time to jump into
Newbridge, on the assumption the worst of the company's problems are
behind it.
David Cooke, of Altamira Management Ltd., says the stock, at its
current level, represents good value. He has been buying it for the
Altamira Science and Technology Fund since it bottomed on Wednesday.
Earlier, the fund had dumped most of its Newbridge stock.
Howard Lis, of Griffiths McBurney & Partners, also looks at Newbridge
as a value play at its current price.
"My approach in terms of valuing the company is that you want to buy
the WAN packet business, the ATM products, at a reasonable cost and get
everything else for free," Lis said. "I put the pin in at $28 a share."
Lis predicts the stock will climb back to $40 in the next 12 months on
some sizable ATM contracts.
This week's missed quarterly target - Newbridge's third in a row - may
force the company to rethink its expansion plans for the next fiscal
year. Last summer, the firm said it planned to hire 1,200 workers in
each of the next three years. Construction at its Kanata, Ont.,
headquarters has also been steady.
Newbridge officials would not speak about possible layoffs or
corporate restructuring, but analysts say it is almost certain that
some cost-cutting will have to be done.
The company's operating margin now stands at just 7.4%, down from 19%
before the missed quarter. Competitors Ascend Communications Inc. and
Cisco Systems Inc. operate on margins of 20% and 33%, respectively.
NEWBRIDGE NETWORKS CORP.: Ratios
Apr. 30 Apr. 30 Apr. 30 Apr. 30 Apr. 30
1997 1996 1995 1994 1993
Net profit margin 11.77 22.18 23.79 28.56 19.51
Return on equity 15.47 25.72 32.81 41.44 30.17
Return on assets 12.57 21.32 27.23 33.14 22.51
Total debt/equity 0.02 . . . . 0.01 0.03 0.12
Current ratio 3.08 4.94 4.73 4.49 3.78
NEWBRIDGE NETWORKS CORP.:
CEO: Terence Matthews
Ticker: NNC
Listed: TSE
Head office: Kanata, Ont.
Tel: (613) 591-3600
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