Part 3
DiviCom
The Company's DiviCom division continues to see strong demand. Unlike the company's silicon division which focuses on designing and marketing silicon encoding and decoding solutions, DiviCom manufactures systems designed to compress, transmit and receive large quantities of digital audio and video information. In other words, DiviCom is a systems vendor, not semiconductors. DiviCom sells its products into several market segments within the video communications market, including DBS, broadcast, wireless cable systems and wired digital video networks, such as switched digital video, HFC and twisted pair. DiviCom's customers include DirecTV, EchoStar,
U.S. West and BellSouth. DiviCom continues to penetrate its core markets such as DBS Satellite, local loop and wireless cable service providers.
However, we note increasing focus on newer markets such as digital
terrestrial, cable and program distribution providers. This could enhance overall revenue growth over the next several years. We expect the entire DiviCom division to grow at a 35-40% annual rate over the new few years. In 1998, we estimate that DiviCom revenues were $146 million, and in 1999 we anticipate sales of $190-195 million.
Valuation
The big question is how to value C-Cube in the context of its very valuable DiviCom division. Given that both Scientific Atlanta and General Instruments (DiviCom's principal competitors) trade at an average of 25 times 1999 earnings and we expect DiviCom to contribute $0.55 to overall earnings per share in 1999, we believe that DiviCom is currently worth at least $14 per share. We would also note that if DiviCom traded as a separate entity, we would expect the company to command a superior multiple given the company's higher growth and profitability relative to its competitors. The remaining piece of C-Cube's 1999 earnings then is derived from semiconductors and should equal about $0.73. The average fabless semiconductor company is currently trading at about 35 times 1999 earnings per share estimates which then implies a $25 value. Summing these two parts then, we get a $40 target based on today's multiples. This is fairly consistent with the more traditional way of valuing C-Cube on projected earnings. Given our projected 20% CAGR (though this may prove to be
conservative) we believe that C-Cube should trade on a multiple of 25 times our 2000 earnings per share estimate of $1.60. This implies a stock price target of $40. Based on these two inputs, we have assigned a 12-month stock price target to C-Cube of $40. Our investment rating on the shares remains "strong buy" and we believe that investors with a 6-12 month time horizon could see near doubling in the stock price. |
