NBMO: PairGain: Reiterating BUY with a $20 price target.
- Reiterating our BUY rating on shares of PairGain with a $20 price target.
- PairGain's recent EPS have been penalized due to the company's R&D investments in ADSL technology. However, the company's valuation multiples have received no benefit.
- With potential contract wins and revenue growth in the strengthening ADSL market, we believe that shares of PairGain stand to appreciate significantly the near-term.
Investment Opinion. We are reiterating our BUY rating on shares of PairGain with a $20 price target, and recommending that investors swap out of Adtran (ADTN, $20 7/16, HOLD) into PairGain. We are establishing a preliminary 2000 EPS estimate of $0.55, which we believe may prove conservative, should the Avidia begin to contribute meaningfully. In addition, we believe that if PairGain is able to find success with Avidia, investors likely will begin to attribute value to this asset, rather than penalize the company for its investment. In such an environment, we would expect expansion in the company's P/E multiples from the current level of 25x to around 35x. Applying this multiple to our preliminary 2000 EPS estimate of $0.55 yields our 12-month price target of $20. Shares of PairGain remain rated BUY.
- Reiterating our BUY rating on shares of PairGain with a $20 price target. We are taking this opportunity to reiterate our BUY rating on shares of PairGain.
- PairGain's recent EPS have been penalized due to the company's R&D investments in ADSL technology. As is well known, over the past year, competition in PairGain's primary historical market (HDSL) has heated up following Adtran's aggressive efforts to gain market share.
As a result of this competition, ASP declines in this market became rather steep, which has had the effect of limiting overall revenue growth for the company as a whole, despite strong unit growth in
the HDSL market. As a response to this increased competition, PairGain elected to increase its R&D expenditures in the ADSL space in an effort to branch into this high-growth market. While the result of this spending, the new Avidia DSLAM (DSL Access Multiplexer) platform, is promising, the increase in R&D has led to poor earnings comparisons over the past several quarters. We believe that shares of PairGain have been penalized for this R&D investment for the past several quarters.
- However, the company's valuation multiples have received no benefit. While earnings have certainly suffered due to this increased R&D, PairGain's valuation multiples have not improved to reflect the increased opportunities derived from this investment. In other words, we believe that PairGain's current stock value discounts relatively little contribution from the Avidia.
- With potential contract wins and revenue growth in the strengthening ADSL market, we believe that shares of PairGain stand to appreciate significantly in the near-term. The company remains extremely positive about this product's prospects, and we believe that it currently is in trials with a number of carriers, including Sprint as well as several CLEC customers. In our opinion, any significant win in this space is likely to be viewed very positively for Pairgain.
Investment Opinion. We are reiterating our BUY rating on shares of PairGain with a $20 price target. In addition, we are concurrently downgrading shares of Adtran to a HOLD and recommending that investors swap out of Adtran into shares of PairGain.
By virtually any metric (book value per share of $3.75 and cash per share of $3.15), PairGain's stock represents a significant value at its current level, and does not appear to reflect the many positives potentially operating in PairGain's favor. The company's 1998 return on non-cash equity was 67.8%, and return on non-cash assets was 35.2%.
We continue to believe that the opportunity for upside appreciation in the stock remains significant. We are establishing a preliminary 2000 EPS estimate of $0.55, which we believe may prove rather conservative, should the Avidia begin to contribute meaningfully. More important, however, we believe that if PairGain is able to find success with Avidia, investors likely will begin to attribute value to this asset, rather than penalize the company for the investment. In such an environment, we would expect expansion in the company's P/E multiples from the current level of 25x to around 35x. Applying this multiple to our 2000 EPS estimate of $0.55 yields our 12-month price target of $20. |
