Lower Price Target & Earnings Est. for 1998-99
Subject: Tellabs, Inc.*
(TLAB--$42 1/2)--OTC Opinion: BUY
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Date: September 4, 1998
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Market Profile
52-Week Range $93-$41 | EPS Growth Rate (3-5 Yrs.) 30%
Avg. Daily Volume 8,050 M | ROAE (LTM) 27%
Shares Outstanding 188.0 MM | Debt to Total Capital 0%
Market Capitalization $7,990 MM | Book Value Per Share $4.96
Floating Market Cap. $6,983 MM | Indicated Dividend/Yield None
Institutional Owner. 70% | Revenue (LTM) $1,379 MM
Insider Holdings 13% |
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Earnings/Share Fiscal Consensus Calendar
1Q/Mar 2Q/Jun 3Q/Sep 4Q/Dec Year Est. # P/E Ratio
------ ------ ------ ------ ------ --------- ---------
1997 $0.27 $0.32 $0.34 $0.42 $1.35 $1.35 31.5x
Current: 1998E 0.37A 0.46A 0.48 0.54 1.85 1.84 23.0x
Prior: 0.50 0.57 1.90
Current: 1999E - - - - 2.30 2.32 18.5x
Prior: 2.44
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Highlights:
- We are lowering our 1998-99 est. from $1.90 and $2.44 to $1.85 and $2.30/sh.
- These are pro forma estimates that assume the Ciena merger gets done.
- Tellabs fundamental outlook is strong, but Ciena's may fluctuate.
- We concur with Ciena's sales est. $880 mm for 1998, but pro forma gross
margins may be under more pressure; revised from 62.4% to 61% level.
- Margin risk relates to pricing pressure on Ciena's DWDM products.
- Near term, Tellabs and Ciena stock performance is restrained by the delay in
the shareholder vote on the Ciena merger until mid November.
- We are lowering our price target from $95 to $80 which is 35x 1999 EPS est,
based on our lowered EPS estimates and reduced industry valuation.
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INVESTMENT THESIS:
We are disappointed with the delay of the merger and the increased uncertainty
of Ciena's performance. However, we believe Ciena contributes to Tellabs
strategy to accelerate its optical broadband platform, and we believe Ciena is
additive to Tellabs earnings growth to sustain above a 30% long term growth
rate.
Detailed models available upon request.
MODEL ASSUMPTIONS, 1999e - KEY CHANGES
Gross Margins: We lowered 1999 from 62.4% to 61% which still assumes Tellabs
can get higher operating efficiencies from Ciena which is 30% of total pro
forma sales.
R&D: We increased this line item from 10.9% to 12% of total sales. Management
is committed to investing in future products such as optical cross connects.
SG&A: No material changes from prior model changing from 15% to 14.7% as a
percentage of total
Revenues: No change in Tellabs, but we did lower Ciena from $900 mm to $880 mm.
We assume the following; $300 mm from IXCs ( $130 mm from Sprint, $115 mm from
WorldCom/MCI, $0 mm from AT&T and $55 mm from other), $370 mm from ILECs/CLECs
( $240 mm from BEL/RBOCs, $100 mm from CLECs, $30 mm from other), and $170 mm
from foreign carriers and $40 mm from Alta.
CIENA FINANCIAL OUTLOOK FOR 3Q98 AND 1998 ON A STAND ALONE BASIS:
We will adjust our EPS est. after the company releases the July quarterly
results expected in the next two weeks with a SEC filing. First Calls
consensus earnings for 1998-99 are $1.10 and $1.26, respectively. We are
confident the Tellabs merger will be consummated.
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