07:45am EDT 16-Sep-98 Prudential Securities (H.MOSESMANN 414-395-2627) VTSS TLA
VTSS: BANDWIDTH STORY IS ON-TRACK--NOW IS AN EXCELLENT BUYING OPPORTUNITY
VTSS: BANDWIDTH STORY IS ON-TRACK - NOW IS AN EXCELLENT BUYING OPPORTUNITY.
R E S E A R C H N O T E S September 16, 1998
Subject: Vitesse Semiconductor (VTSS--$ 26 7/8)
OPINION
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Current: Strong Buy/SBI
Analysts: Hans C. Mosesmann (415) 395-2627 Prior:
Ali Far (415) 395-2626 RISK: Moderate
Alex Gauna (415) 395-2624
12-Month Target Price: $45
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Ind. Div.: - Yield: - Shares: 78.78 mil. 52-Wk.Range: 35-16
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EPS FY Year P/E 1Q 2Q 3Q 4Q
Current 9/98 $ 0.66E 41.7X $ 0.13A $ 0.15A $ 0.18A $ 0.20E
Current 9/99 $ 0.82E 33.5X $ 0.17E $ 0.19E $ 0.21E $ 0.24E
Current 9/00 $ 1.20E 22.9X
Note: Fully-diluted EPS from continuing operations.
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VTSS stock closed down about 7% on Tuesday based, we believe, on concerns over
Tellabs (TLAB-$41 3/16; rated Accumulate by John Butler), ATE, and book-to-bill
levels. On Monday, Tellabs announced that it expected flat sequential revenue
growth for the current quarter, and also that it would discontinue acquisition
talks with Ciena (CIEN-$13; not rated). As a low-to-mid single digit customer,
we view the concerns surrounding Tellabs as overblown. Furthermore, we
anticipate ATE revenues will be up sequentially, and that the company's
book-to-bill ratio remains strong. At these levels, we believe shares of VTSS
represent an excellent buying opportunity.
Our company and industry checks lead us to believe that the September quarter is
on-track for the company to meet or exceed our $0.20 estimate which is also
consensus. Business is strong, particularly in WAN and LAN, and we estimate
that ATE sales will also be up in dollar terms. Going forward, we expect ATE
sales to continue to decline as a percentage of total revenues as growth in the
non-strategic ATE segment is outpaced by demand for telecom and datacom
products.
We believe there remains considerable upside potential for Vitesse out of the
new Colorado Springs fab, which is ramping better than expected with positive
implications for gross margins and revenue acceleration. We anticipate gross
margins will trend to the mid-60's over the next two years from the current
low-60's. We also expect the book-to-bill to continue to trend down over time,
and to drop below 1.2 in the current quarter as the company leverages its newly
established capacity to work away at pent-up demand.
We have every confidence that the company will meet or exceed our third quarter
estimates, and that longer term the outlook remains bright. The company's high
volume gallium arsenide (GaAs) process provides superior performance in high
speed telecom (50% of revenues), datacom (25%), and high-end ATE systems (25%)
and is a compelling solution for years to come.
We are aware that many investors have shied away from VTSS due to the perceived
high multiples. At today's prices, we view VTSS as an extremely attractive
buying opportunity. We reiterate of Strong Buy rating and single best idea
(SBI) designation on VTSS. Our 12-month price target remains at $45.
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