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Newbridge takes a tumble after downgrade
By JILL VARDY
Technology Reporter The Financial Post
OTTAWA -- One of few analysts who correctly foretold the fall of Newbridge Networks Corp. last winter has downgraded its stock again.
Shares in the telecommunications equipment company fell yesterday after analyst Robert MacLellan's downgrade to "reduce" from "hold." The analyst issued a new target price of $32 on the shares.
Newbridge stock (NNC/TSE) fell $1.20 to $42.20 yesterday on the Toronto Stock Exchange, and (NN/NYSE) dipped 3/4 to US$29 1/4 on the New York Stock Exchange.
MacLellan, a long-time follower of Newbridge who recently joined Kearns Capital Ltd., raised warning flags late in January about the company's ability to fill contracts for asynchronous transfer mode
(ATM) equipment. A week later, the stock tanked when Newbridge warned its third-quarter earnings would be worse than expected.
Yesterday, MacLellan said he is concerned the stock is being overvalued, based on an overly optimistic outlook for fiscal 2000, which ends April 30, 2000.
The consensus forecast of analysts is that Newbridge will earn net income of US$1.40 a share in fiscal. MacLellan predicts earnings that year will be closer to US$1.13 a share.
"When we modelled our fiscal 2000 number we determined it is extremely sensitive to any reshaping of Newbridge's sales curve," MacLellan said. "Given that [sensitivity], we think the stock is overvalued by about 32%."
There is also concern that Newbridge needs to broaden its product portfolio to lessen its reliance on ATM sales. Revenue from the company's older line of time-division multiplexing (TDM) equipment is
diminishing, and Newbridge has failed to make substantial inroads into the market for local area network communication equipment.
"If the valuation corrects itself and these strategic issues are addressed -- and I think the company is in the process of doing that -- we would have no hesitation recommending the stock," MacLellan said. "At the moment, it's gotten ahead of itself."
Newbridge reports its year-end results June 2. The consensus of analysts is that the company earned US12› a share in its fourth quarter, giving it earnings per share of US66› in fiscal 1998. MacLellan forecasts that the company will beat that expectation by US1› a share.
MacLellan's earnings estimate for fiscal 1999 is US78› a share.
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