heck if anyone missed it , here it is again!
PairGain May Gain Again
By LISA R. GOLDBAUM
A technology superstar in its early days, Tustin, Calif.,-based PairGain
Technologies more recently has been forced to learn how the other half
lives.
The company, whose products adapt ancient copper telephone wires so they
can transmit high-speed data, has fallen victim to severe pricing
competition from rivals who are trying to wrench away market share.
Investors, the real victims of this price war, have watched the stock
collapse some 60% from its all-time high of about 40 early last year to its
current price of 16 1/2. (Before the decline, PairGain's stock price had
multiplied fivefold from its public debut at 8 in 1993.)
But while PairGain's problems aren't likely to go away overnight, some
followers of the stock believe that the price may finally be bottoming out.
For one thing, prices of high-bit digital subscriber lines (HDSL) may be
stabilizing. (HDSL is the technology PairGain uses to adapt traditional
phone lines for services that need high-speed data transmission, like the
Internet.) Phone companies have embraced HDSL over the past few years
because it lets them boost their existing phone lines' capacity without
having to go through a costly and difficult upgrade to fiber-optic
networks.
That increased demand from deep-pocket players has made HDSL a prime target
of PairGain's competitors, like ADTRAN and ADC Telecommunications. ADTRAN
in particular slashed prices to gain share, plunging the entire industry
into an orgy of price cutting, says Volpe Brown Whelan analyst Timothy
Savageaux, who adds that HDSL prices have slid roughly 30% in the last 18
months.
Sound familiar? It's the kind of dynamic that has made investors in
disk-drive companies pull out their hair over the last few months. And in
fact, PairGain hasn't fared much better than the likes of Seagate
Technology and Quantum, if its stock price is any indication.
But some analysts believe that pricing isn't going to sink much farther. "I
think we're closer to the end than the beginning in major HDSL price
declines," asserts Savageaux. Furman Selz analyst Michael Neiberg agrees,
predicting that pricing pressure will begin to ease over the next six
months.
If they're right, the company and its stock could begin to turn around.
After all, PairGain is still the leader in HDSL, controlling more than half
the market, notes Savageaux. And growth in so-called T1 access lines, which
are used mainly by businesses for high-speed data and is the primary driver
of HDSL demand, is still chugging along at 20-30% a year, the analyst says.
Moreover, despite the price cuts, PairGain's gross margins of about 51%
still outpace the communications equipment industry's 41% margins. In its
first-quarter earnings report released in April, the company said gross
margins actually increased to 51% during the quarter from 49% in the first
quarter of 1997. That may be a sign pricing pressures are easing.
What's more, Furman Selz's Neiberg sees "huge growth" potential for some of
the company's new products like PG-Flex, which allows multiple lines to
operate on a single wire. In that first-quarter earnings report, the
company noted that sales of PG-Flex and a similar product, PG-Plus, were
"[more than] 50% higher than [in] the three-month period ended December
1997." It also emphasized that four of the five remaining Baby Bells have
approved PG-Flex and PG-Plus for purchase.
And some even speculate that the company may be a takeover target. Analyst
Savageaux recently upgraded his rating on PairGain to Strong Buy from
Neutral, calling it "the most attractive acquisition candidate in the
communications equipment universe today," because of its large installed
user base and its dominance in a strategic area like HDSL.
Comparing PairGain to Ciena (a communications-equipment company that has
agreed to be acquired by Tellabs), Savageaux maintains that PairGain could
be bought out for as much as 25-30 a share, a big premium to its current
stock price of 16 1/2.
But if a merger doesn't pan out soon, the stock's depressed price already
may have fully discounted all the problems, and it could be a bargain at
current levels. Even after rising nearly three points in the past couple of
trading sessions (an 18% move), the shares change hands at about 17 times
analysts' consensus earnings estimates of 96 cents a share for 1999, Zacks
Investment Research says. That's a hefty discount to PairGain's projected
earnings growth rate for next year of about 28%, as well as to its expected
five-year growth rate of nearly 31%.
That means that if pricing in the HDSL business really does stabilize in
the next several months and PairGain's new products continue to gain
momentum, the stock could sizzle once again.
BARRON'S Online Weekday Trader is located at
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