Newbridge stock soars 17% on
good earnings, new contracts
James Bagnall
The Ottawa Citizen
Newbridge Networks Corp. share prices
leaped nearly 17 per cent yesterday as
analysts lavished praise on the firm's
recent turnaround.
The immediate catalyst for the jump was
a solid second quarter for the company,
combined with the signing of a potentially
lucrative new contract with China Post.
Earnings were up 34 per cent compared
with the first quarter, and sales of its two
main product lines were healthy.
Newbridge shares hit $45.30 by the
close of trading yesterday on the Toronto
Stock Exchange, up $6.55 on the day.
This represents a one-day gain in market
value of almost $1.2 billion.
The surprising part of this rise is that analysts generally haven't raised
their earnings estimates for future quarters. Indeed, in at least one case,
these have come down significantly.
Nor is Newbridge the only big winner from the China Post deal.
Archrival Ascend Communications Inc. of Alameda, California, also
announced yesterday that it, too, was selected to provide
next-generation data switches to the Chinese government agency.
Ascend shares closed yesterday on the Nasdaq exchange at $57 1Ú8
U.S., up 2.4 per cent on the day. Of course, Ascend has been trading at
or near its 52-week high for the past week; Newbridge shares are still
valued at less than half the record high reached 13 months ago. This is
true even though the share price has soared 38 per cent since the close
of trading Nov. 16.
In fact, Ascend's market capitalization is $12.3 billion U.S., compared
with a shade higher than $5 billion U.S. for Newbridge.
It's a huge gap considering both firms generate similar annual revenues
and are expected to post similar earnings growth next year.
The gap between the rivals is what provides the context for Newbridge's
recent explosion in share value. For most of the past year, Newbridge
shares have been hugely depressed by a series of missed earnings
estimates and one-time hits from a takeover gone wrong.
But, starting with the mid-year hiring of Alan Lutz as the firm's chief
operating officer, Newbridge has begun to set things right in the eyes of
analysts.
Mr. Lutz started by spending a lot of time with the firm's investors and
the analysts who cover the company. Two things helped him to quickly
establish credibility.
First, Newbridge's core business -- the sale of multimedia switches that
use asynchronous transfer mode (ATM) technology -- has always been
strong.
Second, major carriers around the world are now starting to spend
heavily on upgrading their data networks. ATM is becoming mainstream
technology.
All of this, combined with tighter management controls at Newbridge, is
giving investors more confidence that Newbridge can actually meet
analysts' current projections.
"Newbridge is breaking away from its past," BancBoston Robertson
Stephens analyst Paul Silverstein wrote in a research note published
yesterday.
"It faces a significantly brighter future with chief operating officer Alan
Lutz being the catalyst of change."
Mr. Silverstein delivered this conclusion even as he reduced his profit
estimate for Newbridge's current fiscal year to 81 cents U.S. from 86
cents U.S.
"We are trimming our fiscal 1999 and 2000 estimates to bring them in
line with consensus estimates," he noted. "We remain no less confident
regarding the company's progress."
Neither George Hunt, an analyst with Interstate/Johnson Lane, a
Charlotte, North Carolina-based securities firm, nor Patrick Houghton,
an analyst with Sutro & Co. of San Francisco, is changing his earnings
estimate for fiscal 1999, ending next April 30: 82 cents U.S. per share
and 81 cents U.S. per share respectively. Even so, both liked what they
saw in Newbridge's second quarter.
"The turnaround in Newbridge is gaining momentum," said Mr. Hunt,
who has a 'strong buy' recommendation on the company as well as a
12-month share price target of $30 U.S. with "substantial upside" if
Newbridge can show that ATM and Internet protocols are
complementary technologies.
Newbridge closed yesterday on the New York Stock Exchange at
$29.50 U.S., up $4 3Ú8 on the day.)
Mr. Houghton is even more aggressive. He is calling for Newbridge
shares to hit $36 U.S. (roughly $55 3Ú8 on the TSE) within 12 months.
Finally, there are several intangibles influencing the share price.
Mr. Lutz said Monday that Newbridge's two-year old alliance with
Siemens AG of Munich was back on track, prompting some speculation
that the German giant could prepare a takeover bid.
James Kedersha, an analyst with New York-based Cowen & Co.
believes Siemens would come into play only as a "white knight" in the
event Newbridge was the object of a hostile takeover.
Lucent Technologies Inc. of New Jersey and LM Ericsson of Stockholm
are also potential alliance partners or acquirers of Newbridge.
However, Newbridge chairman Terence Matthews still controls a
23-per- cent chunk of his firm and is considered unlikely to tender his
shares to any firm at current share prices. However, he might be
receptive to the idea of a small equity investment from either firm. |
