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Where might TLAB trade in two years? Assuming a slight slowdown in engs. growth rate to 25%, '00 engs. would come in around $3.00 per sh. '01 engs. would be app. $3.75. A 30 PE would give a price of $112.50. A 40 PE multiple would give TLAB a price of $150 per sh. If inflation and rates stay contained, a 40 multiple and $150 target is reasonable. That might seem high to some [40 PE with 25% growth in engs.], but there are not many large companies with the liquidity required by funds, that have the combination of growth, track record, balance sheet,and visibility that TLAB has. A hefty premium of PE to growth rate is therefore likely to be continued. In times of market indigestion, like last fall, it will get crunched and continue to provide an excellent opportunity. In times of euphoria it could sell above a 40 PE and the stock price could exceed that $150 target. It could grow faster than 25% which would make that target slightly conservative. For '99, a target of $98 seems reasonable based on a 40 multiple. Above that, a hedging strategy with out of the money calls could be considered where appropriate. For most though, to quote my last significant post re. TLAB on Sep15, 1998. "At $41 [17X99 engs.], TLAB is a steal. Day trading might be fun and even profitable, but the big risk is that the last trade was a sell and the stock gets away. The real money will be made...by buying and putting it away for the long term." Well, it is no longer a steal, but the last part still applies. A takeover while providing an immediate pop would be a mixed blessing as shareholder value over the next few years would likely be greater with an independent Tellabs. The unwinding of the internet bubble will occur and will be a net positive as interest shifts to investments that have valuations that bear a reasonable relationship to their economic value and probable profits. It won't be a major positive as institutions are not the driving force behind the mania, and they are the major driving force behind TLAB. At the margin, TLAB will pick up more interest from individuals after they get burned by a raft of internet stocks returning to earth. Mike |
