Cell phones..seems cell phones are a possibility.
Some interesting numbers...650 million to one billion
MORE by 2002!! Now, there's a market to penetrate!!
From Barron's On-Line...Nov. 4, 1999
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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Best, Savant |
