7/13/98 briefing.com StreetBeat [TLAB or ERICY as AFCI suitor. Also discusses potential purchasers of ASND]
briefing.com
StreetBeat
Updated: 13-Jul-98
StreetBeat is designed to provide you with additional insights on the market from recognized financial experts on (and off) Wall Street. Please note that the views and opinions expressed by
the panelists below are not necessarily those of Briefing.com.
This week's topic: Telecommunications Equipment Cos
Panelists
Dave Powers, CFA, Senior Technology Analyst at Edward Jones.
Conrad Leifur, CFA, Vice President, Senior Research Analyst at Piper Jaffray Inc.
Q&A
Briefing: Following its earnings warning, Advanced Fibre Communications
saw its market cap cut in half. Do you think that this makes it a particularly
attractive takeover target? If so, who are some likely suitors?
Dave Powers: We do not follow AFCI, so I prefer not to commment. However, I would like to
mention one important trend in technology sector. We are seeing a shift in the use of computers
from a computational focus to a communications platform and in recent months, the strong
technology stocks have been Internet or telecommunications equipment companies rather than the
traditional technology groups like the semiconductor or the PC companies. The reasons the
telecom equipment stocks have performed well are that the industry fundamentals are strong as
the need for bandwidth continues to drive the industry, telecom companies have relatively little
Asian exposure, wireless subscription growth remains strong, and it is not an industry that has
been negatively impacted by pricing pressures. In fact, the telecom industry has actually benefitted
from cheaper computers and price cuts in other technologies. We like the telecomm group and
think that growth prospects over the next several years will remain strong.
Conrad Leifur : Advanced Fibre's (#) UMC 1000 product is one of the best access platforms in
the industry, and would be attractive to equipment vendors who either don't have access or
haven't been doing well in the segment. So the answer is yes, AFC is an attractive target--
particularly in light of the stock decline. Potential suitors include Tellabs, who owns 8% of the
company, and Ericsson.
Briefing: With the communications equipment market growing at a rapid
pace, which companies have been the best at executing and delivering
earnings to shareholders?
Dave Powers: We believe that the two best positioned companies for the long-term are Cisco
(CSCO) and Lucent (LU). They have a deep product portfolio, a proven and consistent track
record, a large installed base, and an excellent management team. We think that over the next
several years, it will boil down to a two horse race between Lucent and Cisco and that these two
companies should continue to deliver superior shareholder value.
Conrad Leifur:The companies that have turned in the most consistent financial results and best
stock performances have been the big, broad line suppliers like Lucent (NYSE: LU, 86-3/8 ),
Nortel (NYSE: NT,58-1/2), Ericsson (Nasdaq: ERICY, 30-3/4), Tellabs (nasdaq: TLAB,
74-9/16). ADC Telecommunications (Nasdaq: ADCT, 35-1/2) has also done a good job, if you
overlook the hiccup in the January quarter.
Briefing: Do you expect increased international merger activity as US
companies vie for a presence in the relatively untapped international markets?
If so, which are the most attractive takeover candidates?
Dave Powers: Yes, we think that there will continue to be acquisitions, particularly of small
international companies that have strong distribution channels and an established sales force. A
recent example is Lucent's purchase of LANNET unit of Madge Networks. One of Lucent's
weaknesses is in the international markets and the quickest way to speed time-to-market is to
acquire a company with a presence. On the flip side, we expect that companies like Siemens,
Alcatel, and Ericsson will look at US data networking companies as a way to increase their
exposure in data networking, which is one of the fastest growing areas in the industry.
Conrad Leifur: Acquiring networking expertise is a higher strategic priority than international for
most equipment vendors, exemplified by Nortel's purchase of Bay. We see Ascend, FORE
Systems, and Newbridge Networks as other takeover candidates in the networking segment.
Longer term, we could see more international acquisition activity, although the big international
players (e.g. Alcatel, Siemens, Ericsson, Nokia) are probably too big for anyone but Lucent to
pull off. On a smaller note, ECI Telecom could be a candidate at some point.
Briefing: Which stocks are you recommending and/or avoiding?
Dave Powers: We have a BUY on Lucent (LU) and Cisco Systems (CSCO)and believe they
are core technology holdings. They are in our model portfolio and as I have mentioned, both of
these companies should execute well going forward. We have a HOLD on Newbridge
Networks (NN) due to concerns over increased competition for its ATM WAN switching
products. We also have a HOLD on Northern Telecom (NT) because we think that the
integration of Bay Networks will be difficult and we are not convinced that NT can turn Bay
around in the near future. Long-term, however, we think that NT will be a major player but until
we are convinced that the Bay acquisition will be a positive event for building shareholder value,
we are taking a more conservative stance toward the stock.
Conrad Leifur:We are recommending ADC Telecommunications (ADCT) and PairGain
Technologies (Nasdaq: PAIR 16-3/8#).
# Piper Jaffray Inc. makes a market in the company's securities.
Nondeposit investment products are not insured by the FDIC, are not deposits or other obligations of or
guaranteed by U.S. Bank National Association or its affiliates, and involve investment risks, including possible
loss of the princiapl amount invested. Securities products and services are offered through Piper Jaffray inc.,
member SIPC and NYSE, Inc., a subsidary of U.S. Bancorp. |
