H&Q Research...03/09/98....good reading...not as optimistic as many of our friends on the thread...especially in the earnings estimates and the near-term direction of the stock price.
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Ascend
Communications
H & Q
ELECTRONIC TECHNOLOGY
(ASND/Dec/$35.06) HAMBRECHT & QUIST LLC Joe Noel (415) 439-3609
Notes: a & f SPOT REPORT Reginal King (415) 439-3419
Recommendation: BUY March 9, 1998
UPDATE ON ASCEND COMMUNICATIONS
Source: MarketMax
* It is still much too early to call the March quarter. We are
currently looking for $0.25 EPS on revenues of $304.0
million.
* We are seeing that the March quarter is back-end loaded
with quite a bit of business still left to close.
* We believe it highly unlikely that earnings will be revised
upward after the Company reports March quarterly
earnings, but believe that there is some possibility that
small upward revisions will be made after the June quarter
is released.
* As has been indicated by many analysts and by
management over the past month, all evidence suggests
that the WAN switch (CSCC) business is very strong and
the pipeline is growing.
* We are maintaining our BUY recommendation on Ascend.
While we believe that the stock is nearly fully valued at
its current levels based on near-term business prospects,
we believe that the worst is behind this Company and
continue to remain confident in the mid to longer-term
strategic outlook for Ascend Communications.
Estimates Q1 Q2 Q3 Q4 FY
`97 EPS ($) 0.31A 0.31A 0.20A 0.24A 1.07A
`97 Revenues ($) 292.7A 311.7A 270.4A 292.5A 1,165.4A
`98 EPS ($) 0.25E 0.29E 0.31E 0.34E 1.19E
`98 Revenues ($) 304.0E 326.1E 347.4E 379.6E 1,357.2E
Revenue Estimates in Millions
52 week Price Range: $22.00-60.00 Current Book Value: $4.88 /sh Revenue(F1996): $546.5 mil
P/E FY98: 29x Cash per Share: $2.40 /sh Shares Outstanding: 198.5 mil
F98Y/Y EPS growth: 11.7% 98 Price to Sales: 5.13x Market Cap: $6.96 bil
Ascend Communications is a leading manufacturer of wide area networking solutions for telecommunications carriers, Internet service providers and corporate customers worldwide. Major product divisions include (1)scalable, carrier-class Frame Relay, ATM, IP and Remote Access core switching products; (2) access concentrator product; (3) Enterprise access products and (4) services and support.
The following is our March quarter update on Ascend Communications based on our most recent investigation:
ú The March Quarter -- It is still much too early to call the March quarter. We are currently looking for $0.25 EPS on revenues of $304.0 million. We believe that it is likely that Ascend will hit these numbers, but believe there is also a slight chance of the Company reporting a small shortfall. Based on current information, we believe a significant shortfall is unlikely. We are seeing that the March quarter is back-end loaded with quite a bit of business still left
to close. We are also seeing that Ascend's business is becoming "lumpier" with larger deals constituting a higher percentage of overall revenues. While this increased lumpiness can often be viewed negatively, it may also work in a particular Company's favor when several large pieces of business close within a given period, and thus provide for some upside to published estimates. We believe that management's recent guidance to sell-side analysts and analyst conference presentations suggest that the Company is guiding revenue numbers to the low $300 million range in order to compensate for some of the near-term order timing.
ú Expected earnings revisions -- We believe it highly unlikely that earnings will be revised upward after the Company reports March quarterly earnings, but believe that there is some possibility that small upward revisions will be made after the June quarter is released. We also believe there is strong evidence suggesting that the Company will report a book-to-bill of greater than one for the March quarter. As has been indicated by many analysts and by management over the past month, all evidence suggests that the WAN switch (CSCC) business is very strong and the pipeline is
growing. Additionally, as is mostly widely known, sales from Europe do appear to be strengthening, and Japan is still stagnated.
Our View of this Stock -- We are maintaining our BUY recommendation on Ascend, but we believe the stock is nearly fully valued at current levels based on near-term business prospects. With the possible exception of voice over IP product enhancement announcements, which are expected later this month, we do not see a near-term catalyst that moves this stock upward to any significant degree. Nevertheless, we believe that the worst is behind this Company and continue to remain confident in the mid to longer-term strategic outlook for Ascend
Communications. We would look for price of $30.00 or less before becoming aggressive buyers of this stock. |
