Tellabs announced 1Q98 results of $0.52 in EPS on $469.7 MM in revenue. Results in
the quarter were driven by better-then-expected sales of TITAN cross-connects, which
posted revenue of $284.1 MM versus our estimate of $253.0 MM. We note that while
total revenues exceeded our estimate by 4.8%, Tellabs' bottom-line was aided by
higher-than-expected other income as well as a lower-than-expected tax rate. After
adjusting for these other items, Tellabs' EPS would have been $0.49 versus our
estimate of $0.48, although going forward, we expect both line items to remain at
the levels reported in 1Q99. Visibility on 2Q99 and the remainder of the year is
quite strong. Although new products contributed relatively little to this quarter's
results, the visibility on Tellabs' new product initiatives, including the AN2100,
is improving. Management remains firm in its intention to introduce its Metro DWDM
product into field trials during the summer and expects to have the BTM, Tellabs'
next-generation cross-connect system, in trial by the end of the year. We view the
BTM as the company's most important new product initiative and as a result, we
expect investors to focus closely on its development over the several quarters.
Given our strong outlook on the remainder of 1999 and growing confidence in Tellabs'
growth prospects for 2000, we continue to rate the shares of Tellabs Strong Buy.
We are raising our estimates for 1999 and 2000. For 1999, we are raising our
estimate from $2.43 in EPS on $2.2 billion in revenue to $2.56 in EPS on $2.3
billion in revenue. For the current quarter (2Q99), we are raising our estimate
from $0.58 in EPS on $532.0 MM in revenue to $0.60 in EPS on $529.0 million in
revenue. We are also raising our 2000 estimate from $3.05 in EPS on $2.7 billion in
revenue to $3.25 in EPS on $2.8 billion in revenue. In addition to a higher
interest income and lower tax rate assumption, this upward revision reflects an
increase in a revenue estimate for TITAN 5500. The company continues to benefit
from strong demand for this core product line. Importantly, TITAN continues to
represent over 54% of the company's total sales, leading to our outlook for strong
growth in Tellabs' business in 1999 and 2000.
We are raising our price target from $101 to $140. Our new price target is based on
a multiple of 43 times our year 2000 EPS estimate of $3.25. This multiple is
in-line with Tellabs' historical average multiple on forward 12-month EPS estimates.
We note that this multiple represents a premium to the upper-end of our long-term
earnings growth rate assumption for Tellabs of 35% to 40%. However, we believe this
premium is reasonable given the fact that, since 1Q96, Tellabs has outperformed
analysts' forward 12-month EPS projections by an average of 15%. |
