Jubak (Microsoft Investor) holding onto TLAB/CIEN
investor.msn.com
Jubak's Journal
Updates
New Developments on Past Columns
Picking up on telecom mergers
So the market has now decided that the merger with Ciena (CIEN) isn't
such a great deal for Tellabs (TLAB) after all. Before the market opened on
Aug. 14, Ciena warned that earnings for the quarter that ended Aug. 1 are
likely to be somewhere between 13 cents and 15 cents per share rather
than the 33 cents analysts were expecting. By noon, the stock was down
almost $16 a share (about 22%). Tellabs followed, falling $11.50 by noon
(about 16%). Worst of all, as the "Heard on the Street" column in The Wall
Street Journal trumpeted, long-term customers AT & T (T), WorldCom
(WCOM) and Sprint (FON) have announced that they'll look at products
from other vendors rather than simply putting in new orders with Ciena.
My take on this is a little different. First, the rationale for this merger, from
Ciena's point of view at least, was that the company was having trouble
selling and that Tellabs' marketing force would help expand Ciena's very
narrow list of customers. Second, I think what we're seeing is an effort by
customers to get better prices from Ciena and other vendors rather than
business moving to Ciena competitor Lucent (LU). (Lucent stock also fell
on the news, by the way.)
How bad is this news really? For Ciena, it's only really terrible if Tellabs
decides to can the merger. So far, Tellabs management is sticking by the
deal and the shareholder vote is scheduled for Aug. 21. Ciena looks on
track to make about 98 cents a share for the fiscal year that ends in
October -- way short of the $1.35 analysts are expecting. If the merger
doesn't go through, Ciena's stock is still overpriced at the current $55.375
a share.
What happens to Tellabs' share price if the merger goes through? Here's
my worst-case calculation. If Tellabs performs as expected, that part of the
combined company will show $337 million in earnings next January. Add in
about $88 million from Ciena (I'm assuming another bad quarter ending in
January with earnings down to 20 cents a share from the year earlier 37
cents). That's a combined $425 million. Now dilute that to take into
account the 102 million new shares that Tellabs will issue to pay for Ciena
(total shares will equal 284 million) and earnings per share next January
will be $1.50. At a P/E ratio of 30, Tellabs stock would sell at $45, or about
$15 below its current price. I'd say that's a worst-case floor price. At the
current Tellabs P/E of 40, the stock would sell at its current price of $60.
Of course, if Ciena's sales and income picture weren't as bleak as it now
looks, the stock would sell above $60. And if Tellabs' marketing team can
actually do what it promises and increase Ciena's sales, then today's $60
will look like a bargain.
That's my bet. I'm holding onto Tellabs in Jubak's Picks.
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