interesting article on future unph Gorilla?
Dow Jones Newswires -- June 17, 1999
Dow Jones Newswires
SMARTMONEY.COM: Betting On The Future
By JOE HAGAN
(This story originally appeared Wednesday)
NEW YORK -- Looking for a divining rod for hot telecom stocks? Talk to fund manager Brian
Hayward. His Invesco Worldwide Communications (ISWCX) fund is the top telecom fund
year-to-date with a 42.9% return, driven in part by some lesser-known companies with triple-digit
returns this year.
As a result, the 51-stock fund has left the S&P 500 in the dust by 37 percentage points, outpacing
the S&P Communication Equipment index by 14.6 percentage points.
The fund has a 40.4% three-year return (Hayward arrived at the fund in 1997), according to
Morningstar.
Hayward's stock-picking strategy sounds straightforward enough: He buys and holds industry
leaders such as America Online Inc. (AOL) and MCI WorldCom Inc. (WCOM), which form the
bedrock of his portfolio. But there's more to it than that.
His modus operandi is to find companies taking the most advantage of the increase in data traffic
and telecom deregulation. And four lesser-known returns with huge growth this year: Metromedia
Fiber Network Inc. (MFNX), EchoStar Communications Corp. (DISH), Uniphase Corp.
(UNPH) and Viatel Inc. (VYTL). For Hayward, these are 21st century market leaders that he's
catching on their way to the top.
First, there's Metromedia Fiber, a holding that has jumped from the No. 9 spot in the fund to No. 2
in the last two months.
Hayward purchased Metromedia Fiber on the merits of its unique objective - to wire up the major
metropolitan cities of the U.S. with local access, high-speed, high-bandwidth fiber networks. He
bought in early 1998 when the stock was selling for $2 a share and today the stock is at $37.19 a
share, up 143% this year alone. The company is laying down a network of "dark fiber," which
means the fiber pipelines are not yet "lit" with information.
That's where contracts with Lucent Technologies Inc. (LU), Williams Cos. (WMB), AOL and
Time Warner Telecom Inc. (TWTC) come in. For a price, these companies get to "light" the fibers,
and thereby reach the all-important end user.
"The biggest bottleneck in the network today is the local loop," explains Hayward. "That's the last
piece of the network, the end user.
This company is making it economically feasible for corporations to have their own bandwidth."
According to analyst Polina Ialamova of Madison Securities, "What they're offering isn't offered by
anybody else on such a scale." The company has continually surpassed its own expectations in
terms of its schedule for completing the network and their s tock has shot up in response. MFN, of
course, has no earnings, but that's par for the telecom course. Ialamova says that as its fiber empire
unfolds, it'll be "cash-flow positive" by 2001. Does this mean more wild growth for MFN this year?
Hayward thinks so.
"By year end, it could continue to grow," he says. "It's in what, 11 cities? It's not even in the top 50
markets yet and those should be able to support what they're doing. And we haven't seen anybody
else who's coming in and doing the same thing." Meanwhile, there's Uniphase, literally the light at
the end of the tunnel.
Uniphase designs the laser equipment required to send information through fiber-optic lines - the
component that transforms fiber from dark to lit.
Year-to-date, the stock has lit up 107.8%.
Hayward bought Uniphase last fall when it was selling in the 40s, based largely on its dominance in
the market for undersea components. The stock is now at $144.44 a share.
"Capacity across the oceans is another bottleneck," says Hayward. "We knew what plans were in
place for going across the ocean. We knew that demand for their product was going to be very
strong for the next couple of years at least. The trends were already there. They had the
technology." Since Uniphase has merged with its No. 2 competitor, JDS Fitel, Hayward says the
company is poised to become the "800-pound gorilla of this space."
Kevin Slocum, managing director of SoundView Technology Group, a brokerage firm specializing
in technology stocks, agrees, noting that while companies like Lucent and Nortel Networks Corp.
(NT) make these components on a limited level, Uniphase specializes in them.
"It's hard to define market share for the company. They are the leading supplier of optical
components." While MFN and Uniphase may be cornering their markets, EchoStar, a
satellite-television-broadcasting company, does indeed have competition.
From Hughes Electronics Corp. (GMH) no less, which owns DirecTV. Here's where Hayward's
stock divining rod comes in handy. EchoStar is up a whopping 178.8% this year at $132.69 per
share. Hayward bought it when it was in the 20s last fall. Why did he choose EchoStar and not
DirecTV? "It's more of a pure play than Hughes," answers Hayward. "Hughes has, besides
DirecTV, PanAmSat Corp. (SPOT) - they've got a satellite business. EchoStar isn't burdened with
those difficulties."
The industry as a whole has received a lift from a change in regulations allowing EchoStar and
DirecTV to offer local broadcast over the cable system. This, coupled with the demise of
PrimeStar - a faltering third competitor that was absorbed by DirecTV - has helped EchoStar
increase its subscriber base by 103% over the last year and gain about 25% of the
satellite-television market, according to Armand Musey, an analyst at Banc of America Securities.
(DirecTV's slice of the market is twice that, but Hayward still considers EchoStar the market
leader.)
Musey, who recently raised his price target for EchoStar from $130 a share to $153, predicts
another 14% growth for the stock by year end. "It has reached the critical mass that it needs," says
Musey. Hayward has increased his weighting and is holding tight. "I'm not selling right now, so I'd
say it could go a little farther." Finally, there's Viatel, a "noncore" holding of Invesco Worldwide
Communications.
For Hayward, this company has the potential to be a market leader, but isn't one just yet. Viatel is
one of a half-dozen in the race to wire Europe with a fiber network as deregulation of incumbent
monopolies takes effect. Its stock is up 114.2% this year. Hayward bought Viatel at $13 per share
when it was undervalued relative to its competitors.
Since the first of five of its network "rings" was lit earlier this year (in other words, up and running),
its stock has risen to $46.25 a share.
"The revenue growth is going to be really big this year," says analyst Thomas Morabito of Scott &
Stringfellow. "Each time a ring is completed, it's an automatic boost to the stock." Morabito also
notes that Viate l has a contract with Teleglobe Inc. (TGO) to use its fiber network, which "really
validates what they are doing. Anytime you see blue-chip customers, it's a good sign." While Viatel
is $1.2 billion in debt, Morabito thinks the demand for fiber networks will continue to outrun the
supply in the European market, especially with the increased demand for streaming video, which
requires massive amounts of fiber bandwidth.
Plus, the company will be able to bankroll its plan for wiring 42 leading European cities with this
week's secondary stock offering. As Viatel grows with each ring lighting, it will also become an
attractive candidate for acquisition - if it doesn't get too big. (Revenue is expected to increase by
123% this year and another 78% by 2001.) Says Morabito: "There's a lot of companies that want
a presence in Europe."
If keeping up with the advanced technologies of these companies makes you woozy, it's good to
know you can just invest in Invesco Worldwide Communications and let Hayward do the work for
you. There's nothing quite like investing in a hot sector, and being right.
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