H&Q SPOT REPORT
[IMO, in short, more near term uncertainty RE: Asia & GTE. Main reason for reiterating buy seems to be current valuation - versus any compelling near term catalyst (plus, H&Q's customers would string them up them if H&Q waited until stock hit $10 to go to neutral):
While we feel that most indications of the progress of AFCI's recovery may have been somewhat unclear over the past several weeks, our most recent analysis yields information that we should revise our estimates for future periods.
* For the September quarter we are expecting AFCI to earn $0.06 EPS on $75.1M in revenue.
* The change in our estimates may be primarily attributed to (1) a modification of our estimate of business currently being realized in China, (2) a decrease in AFCI's revenue from GTE, and (3) some weakness in certain other international accounts. However, we believe that the core domestic business appears to be on track for the quarter.
* We continue to believe that AFCI maintains upside opportunities related to its remaining a strong contender for several RBOC contracts: Sprint, Bell South and SBC.
* We reiterate our BUY rating on AFCI due to our confidence in the Company's prospects over the coming quarters. With strong industry fundamentals, continued strength in international sales, its technologically advanced UMC 1000 product, and likely RBOC contracts,
we expect growth to accelerate over the coming quarters.
ADVANCED FIBRE COMMUNICATIONS IS A LEADING MANUFACTURER OF TELECOMMUNICATIONS SYSTEMS FOR THE "LOCAL LOOP" BETWEEN TELEPHONE SERVICE USERS AND PUBLIC TELEPHONE NETWORKS WORLDWIDE. AFCI HAS PIONEERED A SINGLE PLATFORM THAT SUPPORTS ANY NETWORK, ANY TRANSPORT, AND ANY SERVICE. AFC'S FLAGSHIP PRODUCT, THE UMC 1000 3RD GENERATION DIGITAL LOOP CARRIER (3GDLC) PROVIDES ANY SERVICE FROM POTS TO XDSL OVER COPPER, FIBER, HDSL, COAX AND RADIO TRANSPORT MEDIA.
Since Advanced Fibre Communications' pre-announcement of a June quarter shortfall and its subsequent reporting on July 14, we have remained in close contact with the Company's management team to monitor the progress of AFCI's recovery. While we feel that most indications of this progress may have been somewhat unclear over the past several weeks, our most recent analysis yields information that we should revise our estimates for future periods.
September Quarter :
For the September quarter we are expecting AFCI to earn $0.06 EPS on $75.1 million in revenue. The change in our estimates may be primarily attributed to (1) a modification of our estimate of business currently being realized in China, (2) a decrease in AFCI's revenue from GTE, and (3) some weakness in certain other international accounts. However, we believe that the core domestic business appears to be on track for the quarter.
Upside Opportunities :
We believe, as most analysts and investors had predicted, that AFCI may not be the recipient of any substantial business from the Bell Atlantic DLC equipment contract. It appears that most of this business may be directed to the incumbent supplier. Nevertheless, as indicated in our last report, we believe that Advanced Fibre Communications remains a strong contender for several other contracts with major telcos: Sprint, Bell South and SBC. It appears that the Company may have signed an incremental contract with Sprint and we expect that it is likely the award of this contract may be announced over the next couple of weeks. We continue to believe that the Bell South and SBC contracts may not be awarded until the latter part of this year. We feel that AFCI remains well-positioned and very competitive at SBC, due to its prior relationship with Pacific Bell.
Further, we continue to believe that AFCI remains very competitive internationally. In particular, we believe that AFCI remains well positioned to capture substantial business from a large Asian telco customer. We estimate that the award of this contract could be worth 10-15% incremental revenue to AFCI as early as the first half of
1999.
Remains Ahead of the Market :
We believe that one of the problems that AFCI continues to experience is that the telecommunications carriers are still not prepared to implement the higher-end features and functions that the UMC 1000 currently provides.
Many telcos are still extremely voice oriented and continue to work feverishly to satisfy voice and dialtone demand, but have yet to transition to supplying the data services that they have been promising their customers for several years. Consequently, this situation puts Advanced Fibre Communications at somewhat of a
disadvantage relative to its more traditionally focused competitors.
Future Quarters :
Because of the aforementioned areas of weakness and our revised growth outlook for the Company, we are taking this opportunity to trim our year-end estimates to $0.37 EPS on $328.3 million in revenue and $0.56 EPS on $434.3 million in revenue for 1998 and 1999, respectively. We believe that these revised estimates are conservative and that Advanced Fibre should be able to meet or exceed these estimates over the coming quarters.
Recommendation :
Currently, we believe that investors are presented with an excellent buying opportunity for AFCI's stock. In spite of the weakness in certain areas of the Company's business, we believe that the approximately 73% decline in AFCI's stock price over the past six weeks has been somewhat excessive. We continue to feel that the
expected upcoming good news will continue to demonstrate that Advanced Fibre remains a viable on-going concern and that the potential catalysts for accelerated growth continue to exceed the most probable contributors to revenue weakness.
Although we are revising our estimates for future quarters, we believe that the sell-off in AFCI has been over done for at least two reasons. First, we remain confident in Don Green and the senior management team's ability to lead the Company in its quest to reinvigorate its growth. Advanced Fibre Communications continues to economically offer state of the art technology to telecommunications carriers whose customers patiently await the delivery of promised broadband data services. Similarly, it appears that many investors continue to under-estimate the leverage that AFCI's international sales may provide over the coming quarters. Second, we feel that there is substantial takeout value associated with this Company because of its data orientation, increasing international component of sales and strong CLEC sales.
We believe that AFCI's management team will prove its ability to execute its strategic plan over the coming quarters. We also feel that there exists many revenue and earnings upside opportunities over the next several quarters at Advanced Fibre Communications. Considering our projected EPS growth for 1999 of 51%, we believe that AFCI's valuation is compelling. Currently trading at only 39% of its 1999 EPS growth rate, we believe shares of this Company are attractively priced and that at this level investors should seriously consider purchasing this stock. We reiterate our BUY rating on AFCI.
|
