Didn't know if this was posted after the AOL announcement...
Stephens Inc. Research Bulletin
January 13, 1999
Rev. Mkt. Cap
AWARE, INC. FYDec. ($ Mil) EPS P/E ($ Mil)
AWRE - $36
Rating: BUY 97A $6.2 ($0.23) NM $733.2
Price Target (12 mo.): $45 98E 11.8 (0.13) NM
Charles W. Pluckhahn, CFA 99E 21.5 0.14 257.1x
(617) 574-0017 00E 32.0 0.39 92.3x
AOL Gets Behind ADSL; Raising Price Target to $45
Bell Atlantic and America Online have announced a joint venture to bring Internet content to phone
customers via Asymmetric Digital Subscriber Line starting in 1999. The numbers of homes to be passed
are 7.5 million by the end of 1999 and 14 million by the end of 2000. Including yesterday's announcement
by SBC Communications, Regional Bells have now publicly committed to being able to offer ADSL
connectivity to upwards of 25 million customers by the end of next year. And that's not counting
Ameritech, BellSouth, U.S. West, the major independent telcos or any of the interexchange carriers such as
MCI Worldcom and Sprint, which have made noises about rolling out ADSL-based services.
As a result of the two announcements, we are reiterating our BUY rating on Aware's shares and have
raised our one-year price target from $32 to $45 to reflect the great level of certainty that ADSL will be
introduced into the telephone network in mass quantities in 1999 and 2000. In the coming weeks we will be
reviewing our financial projections for Company results, particularly our very conservative assumptions of
the number of personal computers that we have forecast to be equipped with ADSL-capable modems. After
Aware reports its earnings on January 26, we expect to issue a fresh set of projections and make further
adjustments in our price target.
We have always believed that America Online would have to associate itself with ADSL and have for
several years been attentive to various trial projects and rumors to that effect. The refusal of cable
companies to allow the telephone company equivalent of equal access for Internet portals such as AOL, and
the federal government's evident reluctance to force such access, has added an element of urgency to the
need by AOL to secure broadband pathways to customers. From the telcos' point of view, the AOL
alliance will be a powerful drawing card for the mass consumer market.
We assume that AOL will strike more DSL distribution deals with the phone companies, which in turn
should lend additional credibility to the mass-market roll-out scenario that has provided the underpinnings
for our initial recommendation of Aware shares on September 29 at $7.25 and subsequent increases in
price targets as technical and marketing milestones have been met.
Our valuation is based on our belief that Aware can earn $0.63 per share, fully taxed, in 2001. Now that
key milestones are being met, we have raised our target multiple on the Company's shares from 60 times
forward 12-months earnings to 80 times forward 12-months earnings, to reach a target of $50.40 by the
beginning of 2001. We have discounted that back at a 10% rate to a year from the most recently reported
earnings by the Company, to arrive at a price target of $45 by the end of the third quarter of 1999. |
