WSJ,Components>
Bulls Say Cellular Component Makers
Signal Promise
BY CAROLYN WHELAN
The future of cellular service simmers in a confusing alphabet soup: CDMA,
UMTS, 3G. These represent new technologies for wireless data
transmission. Data, the pundits say, will drive future handset sales.
Obstacles remain, however: Operators won't sink
money into fancy features consumers don't
necessarily want, and governments still argue over
the next standard.
But while the policy wonks slug it out, voice remains the "killer app" today.
Why? Demand for the plain-vanilla models far exceeds the most ambitious of
projections.
That's good news for big guns like Nokia and Motorola, whose stock prices
have already hit the roof. But it's even better news for companies on the
lower rungs of the ladder: component makers for wireless handsets and
infrastructure.
Though those lesser-known stocks have also had a great run -- relative to
the accelerating pace of the cellular market -- they still look reasonably
valued, the bulls contend.
Last month, number one player Nokia estimated there are 420 million
handsets in circulation worldwide today, based on its own sales. That means
penetration is as much as three years ahead of forecasts.
That translates to between 650 million and 1 billion more handset sales by
2002 instead of by 2005, says Pete Peterson, an analyst at Volpe, Brown
and Whelan.
So who's lower down on the food
chain?
RF Micro Devices's chips go into
Nokia's handsets, Anadigics feeds into
Ericsson's phones, and Powerwave
Technologies sells its parts to
operators like Bell South, Airtouch,
AT&T and GTE in the U.S.
"Today's wireless market is radically
different than last year, and the market
hasn't caught on to that," says Peterson, citing a "psychological hurdle" that
was overcome in Japan and Scandinavia, where wireless penetration surged
after reaching 25% of the population. "At a certain point, having a mobile
phone is a social imperative."
Also, new plans like AT&T's One Rate are driving handset sales because
customers can more precisely anticipate the cost of their calls.
RF Micro Devices makes power amplifiers, which boost the power of a
radio signal within a handset. But RF's claim to fame is a new technology
called Gallium Arsenide HBT. It dramatically improves performance, like the
"long talk time" on some Nokia phones. Nokia accounts for 60% of RF's
revenues. Only one other company, Conextant, the Rockwell Semiconductor
spinoff, has HBT.
Perhaps that's why RF's revenues have more than tripled, to $150 million
over the last year. "To go from $45 million to $400 million [Ashley's 2000
estimate] over a few years is pretty amazing," says Ryl Ashley, an analyst at
Needham & Co.
"They have the right technology, right process, designed into the right
company at the right time," adds Peterson, who rates the company a Buy.
That should lead to "good margin expansion and revenue growth," he says.
At Thursday's closing price of 53 3/4, RF Micro Devices, which has a
market capitalization of $3.8 billion, brushes its high set in October. But at 92
times expected 2000 earnings of 58 cents (for the year ending in March), its
P/E is at a discount to its expected 2000 earnings growth rate of 121%,
according to First Call.
Another favorite is Anadigics, which
generates more than 30% of its sales
from cell phones, in particular power
amplifiers; Ericsson accounts for 20%
of sales. Another 30% of revenues
come from cable television set-top
boxes. The rest of its business comes
from fiber for Nortel and Lucent.
Those aren't bad markets or
customers.
And new switches could mean twice
the revenue per phone, says Stacie Cowell, who manages Invesco's Small
Company Growth Fund. Cowell added to her Anadigics holdings 10 days
ago, after its secondary offering. Peterson rates the company a Buy.
Cost savings should help, too. The company just opened a new factory that
will quadruple production capacity. "They claim better cost efficiency than
competitors, so they should have some upside on the growth margin," says
Cowell.
Anadigic's Asian exposure is an advantage, too, says Scott Searle, an analyst
at Dain Rauscher Wessels, who rates the stock a Strong Buy. "These guys
are playing catch up to put capacity into the network," he says.
At 46, small cap Anadigics is also at its high. And its P/E of 53x expected
2000 earnings of 86 cents per share is at a discount to its 2000 growth rate
of 83%, its historical P/E of 57 and the group average of 68x 1999 earnings.
And some see more upside.
A play on cellular infrastructure is Powerwave, which makes multicarrier
amplifiers. Those parts significantly increase the number of conversations a
single amplifier (the most costly part of a base station) can handle. That saves
carriers money -- big time.
Peterson, who rates the stock a Buy,
calls the widgets "the biggest bang for
the buck" for a base station upgrade.
"It's one of the few ways you can reach
into the base station without radically
reengineering it," he says.
Outsourcing could also add wind to
Powerwave's sails. While it and other
merchants only make around 25% of
power amplifiers, says Searle (the
majority is produced internally), future
data models will force gear makers "to look towards third parties for
amplifiers," he says, potentially doubling their market share.
Shares of Powerwave, whose market capitalization is $1.3 billion, set a new
high Thursday of 72 3/4. But its P/E of 59x expected 2000 earnings of $1.23
is less than two times its growth rates of 40% that year and 32% over the
long-term. It's also discount to the group P/E average of 63x 1999 earnings.
Bullish market estimates aside, how things go for Nokia and Ericsson will
directly impact RF Micro Devices and Anadigics' sales. RFMD, however,
has new business from Ericsson, Motorola and Qualcomm. And carriers
need to rally around Powerwave's multicarrier alternative. But cost savings
make the decision a no-brainer.
And with this kind of growth, the bulls think many of these cellular
component makers should be a good call on Wall Street.
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