excerpts from levy's post-earnings write-up -- a week old.
you'd think he'd finally pick up a few shares for himself.
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Tellabs, Inc: Tellabs Just Keeps on (Up)Ticking
Author: Steven D. Levy (212)526-2499 / Sender Cohen x3777 / Andrea Green x3860
Rating: 1
Company: TLAB
Country: SEO CUS
Industry: TELECM
Ticker : TLAB
Rank (Old): 1-Buy
Rank (New): 1-Buy
Price : $108 5/16
52wk Range: $115-31
Price Target (Old): $110
Price Target (New): $140
Today's Date : 04/15/99
Fiscal Year : DEC
Price (As of 4/14): $108 5/16
Revenue (1999): 2.3 Bil.
Return On Equity (99): 32.7%
P/E 1999; 2000 : 41.9X; 32.8X
Disclosure(s): C
Highlights:
* Tellabs reported another excellent quarter which was well ahead of
expectations. Revenues of $469.7 million were $21 million higher than our
forecast of $448.6 million and EPS of $0.52 were 6% above our $0.49 estimate.
* Our confidence level in Tellabs' ability to grow at or above 30% through
the year 2001 has significantly upticked following yesterday's earnings
release.
* We are once again compelled to raise our revenue and earnings forecast for
1999 and 2000. Our new 1999 and 2000 top and bottom line numbers now include
revenues of $2.26 billion (+36%) and $2.94 billion (+30%) and EPS of $2.58
(+33%) and $3.30 (+28%) respectively.
* We are comfortable raising our end-of-year price target on TLAB shares to
$140 from $110 based partially on our increase in EPS expectations for year
2000--$3.30 compared to our prior estimate of $3.15--as well as a higher
target P/E multiple of 43 times forward 12 months earnings.
* Tellabs remains our #1 idea in the Telecommunications Equipment industry.
In our view the potential upside to current prices are significant enough to
continue buying TLAB shares even though they have already appreciated by 60%
year-to-date.
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Summary and Recommendation
In the current market environment it is hard to imagine any investor
objecting to the idea of paying a premier valuation for the stock of a
company that has (1) consistently exceeded expectations for more than eight
years, (2) has grown in excess of 35% per year for most of the decade and is
positioned to keep that growth rate going for the next few years, (3)
is already one of the most profitable players in one of the most of the dynamic
industries in the world, and (4) is about to introduce some of the most
important and exciting products in its history. Therefore, we are
comfortable raising our end-of-year price target on TLAB shares to $140 from
$110 based partially on our increase in EPS expectations for year 2000--$3.30
compared to our prior estimate of $3.15--as well as a higher target P/E
multiple of 43 times forward 12 months earnings, that is in line with the
stock's current P/E and only a 40% premium to the company's growth rate.
Tellabs remains our #1 idea in the Telecommunications Equipment industry.
So How Long Can This Song Play On?
Following the release of the company's first quarter results it is becoming
even more clear, in our opinion, that the Tellabs melody is gaining strength
and has a long way to go before it is fully played out. In fact, with two
major new products in the area of fiber optic transmission only months away
from field trials, and no loss in momentum in the march of new customers
signing up for the company's two flagship products, our confidence level in
Tellabs' ability to grow at or above 30% through the year 2001 has
significantly upticked. With a harmonious orchestra of strong industry
fundamentals supporting the Tellabs song our optimistic view could once again
be proven conservative.
Some incremental "tick"ler items that should boost investor confidence in
Tellabs ability to meet or exceed expectations:
* Backlog grew materially during a period that does not traditionally
produce a book-to-bill ratio greater than 1:1.
* In addition to the tremendous performance of Tellabs' flagship digital
cross-connect system, the TITAN 5500, its older, non-SONET digital cross-connect
system, the 532L experienced an acceleration in demand. This is a
sign, in our view, of the longer-than-average product life cycles in the
telecommunications equipment market.
* Tellabs continues to sign up new carriers for its products with 13 new
Martis DXX networks and five new TITAN 5500 service providers clients. With
more than 165 Martis customers and 85 TITAN 5500 customers Tellabs has a
tremendous installed base to expand-read very profitable add-on and expansion
business-and sell new products to.
* A late-life kicker for the TITAN 5500, Feature Package 6.0, which
essentially doubles the size of existing systems, was released late in the
quarter and probably accounts for a good portion of Tellabs' increased near-term
visibility.
* Absolute accounts receivables declined sequentially by almost $100
million, or 20% even though revenues declined by less than 10%. This
effectively removes the one small blemish on Tellabs otherwise pristine
balance sheet.
For most of the decade we have maintained earnings projections that have been
at the high-end of the street only to be shown up by the company's actual
performance. While we recognize that the day could come when an uptick to
EPS estimates is not called for, today is not that day. Thus, we are once
again compelled to raise our revenue and earnings forecast for 1999 and 2000.
Our new 1999 and 2000 top and bottom line numbers now include revenues of
$2.26 billion (+36%) and $2.94 billion (+30%) and EPS of $2.58 (+39%) and
$3.30 (+28%) respectively. These figures are $48 million, $60 million, $0.12
and $0.15 above our prior projections. Investors should note that
approximately $0.04 per share per year of the increase in EPS estimates comes
from a lower tax rate assumption but the majority of it is clearly related to
higher sales and slight improvements in operating profitability.
Investment Thesis Intact; Keep Buying TLAB Shares
The critical components of our investment thesis on Tellabs have been, and
remain, that the stock should continue to do well because of (1) strong
industry fundamentals, (2)excellent and possibly dominant product positions
in select industry sub-segments, (3)better than expected technical
capabilities to deliver "new age" products, and (4) a high likelihood of
uptick surprises relative to even the most optimistic estimates.
The only threat to this thesis is not likely to surface until the end of this
year or early next year when Tellabs is scheduled to bring out the successor
product to the TITAN 5500. At that time, and most probably not much before
then, investors should have enough information to decide whether the next
major leg up on TLAB shares is likely to be more of the same or whether a new
day (and millenium [sic]) is dawning. In our view the potential upside to current
prices are significant enough to continue buying TLAB shares even though
they have already appreciated by 60% year-to-date.
BUSINESS DESCRIPTION: Tellabs offers a wide range of voice and data
communications products used by telephone companies, cellular carriers,
interexchange carriers, governments, and businesses worldwide.
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The Lehman
Brothers analyst who covers this company also has position in its securities. |
