Following is the Lehman Bros. report. Note that while it has a neutral rating on PAIR, it has a price target of $18. I think the report came out on 8/11:
"-We are initiating coverage of PAIR with a 3-Neutral Rating.
-Our price target is $18.
-We are forecasting FY 1998 revenues of $301 million and EPS of .65.
-We are forecasting FY 1999 revenues of $346 million and EPS of .74.
-PAIR is the leading vendor of HDSL products and systems being used by telcos to deliver high-speed services T-1 over plain copper wires. Additionally, a growing percentage of the company's revenues come from small subscriber systems designed to cost effectively provision telephone services in low-density geographies.
While PAIR continues to be the dominant N.A. supplier of HDSL systems, the company has been impacted lately by pricing pressures on its main HiGain HDSL product line that have been more severe than expected and lingered longer than predicted. On the positive side of the equation, the company has begun to ramp-up sales of its PG Flex and PG Plus small subscriber systems to meaningful levels. These products are critical to PAIR's growth, in our opinion, because they are system level products in the rapidly growing access segment of the telecommunications equipment industry and can dramatically increase PAIR's addressable market. Four of the five RBOCs (SBC being the exception) have approved the company's small subscriber systems, and all four have started taking shipments of the products.
PAIR has also positioned itself to ride the next wave of bandwidth enhancing, copper-based technologies generally referred to as tnext generation DSL, "NG"DSL, or xDSL. Earlier this year the company licenses its core chip level ADSL technologies to Rockwell, which in turn expects to leverage its existing base of modem vendor customers tin order to capture a significant share of the market for these new broadband communications devices. Rockwell is paying PAIR slightly less than $2 million per quarter in licensing fees and advances on per-unit royalties. This revenue stream is expected to last through the end of 1998, however, further payments from Rockwell will be dependent on that company's ability to sell ADSL chip sets to its vendors.
We are initiating coverage on PAIR with a HOLD rating. We foresee the company growing its top line by only a modest 7% to $301 million this year, with the bottom line declining 3% to .65 share. 1998 has been a challenging year due to pricing pressures in HDSL and the lower than expected sales of the company's Campus HDSL products. For 1999, both the sales and earnings figures are estimated to expand as the pricing pressures subside and sales levels of PG Plus and PG Flex grow, resulting in top and bottom line growth of 15% to $346 million and 15% to $.74, respectively. Our confidence in these figures has waned of late, however, as the HDSL pricing pressures have been more persistent than anticipated. We can envision a slight expansion in PAIR's P/E multiple but not until PAIR's revenue growth begins to accelerate. Thus we expect the stock to continue to tread water until at least the end of the year. For investors looking for profitable companies - PAIR has operating margins above 20% - that are potential takeover candidates and are selling at seeminly low multiples of earnings - less than 20 times our 1999 EPS estimate - PAIR might seem attractive. Our view, however, is that for the next six months or so the upside potential is not worth the downside risk of additional earnings estimate cuts. (END) |
