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Technology Stocks : Newbridge Networks -- Ignore unavailable to you. Want to Upgrade?

To: Bron-y-aur who wrote (17406)	2/21/2000 4:49:00 PM
From: zbyslaw owczarczyk	Respond to of 18016

worldlyinvestor.com Region of the Day Still Time to Find Good Value, Strong Growth in European Internet Stocks By Michael Ward and Mido Shammaa, Internet Stocks Columnists Both Alcatel and Ericsson offer investors key positions in the growth of the European Internet market. Feel like you missed the heyday of the Internet gold rush in the US? It's not too late to catch the show in another theater -- even one as well-known as Europe. France's Alcatel (NYSE:ALA - news) and Ericsson (Nasdaq:ERICY - news) are excellent prospects. Investing in European Internet companies now is like investing in the US Internet sector two years ago. Sure, valuations are higher, since investors around the globe have grown more comfortable with higher price-to-earnings ratios. But Europe still offers strong value and growth prospects. Add to that the prospects for heightened merger and restructuring activity on the continent, and Europe grows even more appealing. The question then is how to play the growth story. Our preference is to look for companies that combine exposure to the Internet with businesses in traditional telecom, wireless and broadband. Two Different Strategies So we arrive at Alcatel and Ericsson. Both stocks offer an exciting opportunity to develop a position in the burgeoning global Internet equipment market. And they allow so at better valuations than their US peers. Playing these stocks gives investors a combined exposure to wireline telecom, broadband and wireless equipment sectors. Both companies are focusing on acquiring and developing Internet Protocol (IP) technology. IP is a standard that describes how packets of data are transported across the Internet and recognized as an incoming message. During the past two years, Alcatel has spent more than $8 billion to acquire six companies, mostly in the US. Last week, news surfaced that Alcatel is seeking to acquire Newbridge Networks (NYSE:NN - news) in order to beef up its asymmetric digital subscriber line (ADSL) offerings and its networking products line. Ericsson is taking the opposite approach, developing its technology internally. It is already a world leader in mobile systems and has a head start in developing wireless application protocol (WAP) products. Attractive Valuation From a valuation perspective, both companies look attractive. Alcatel is trading at less than half the price-to-earnings ratio of competitors such as Nortel (NYSE:NT - news) and Cisco (Nasdaq:CSCO - news) and in line with recently battered Lucent (NYSE:LU - news). Alcatel's rumored purchase of Newbridge -- which has yet to be confirmed by either company -- would, of course, change this. An acquisition would depress earnings in the short term, but could afford Alcatel better strategic prospects as it becomes a more viable competitor. That would enhance its market multiple. Alcatel's Margins Thinner Currently, Cisco deserves to trade at a higher level than Alcatel because of its higher earnings quality, higher margins and its credibility with Wall Street. For a clearer view, we looked at the sales-to-earnings ratios of the four companies. Cisco requires $4.85 in sales to generate a dollar of earnings. Alcatel needs $19.44 in sales to do the same -- 34% more than Nortel, 95% more than Lucent and 300% more than Cisco. Alcatel's strategy of shedding or restructuring low-margin and money-losing divisions would bring the company's numbers more in line with peers and drive the stock price. Bandwith Demand Benefits Ericsson Ericsson outpaces main competitor Nokia (NYSE:NOK - news) in earnings growth and improvement in sales-to-earnings. However, the companies have comparable price-to-earnings ratios. As a leader in supplying infrastructure, Ericsson would be a primary beneficiary from the expansion in demand for bandwidth. This is similar to the trend we saw in wireline equipment. As data traffic surpassed voice traffic, demand for bandwidth to supply multimedia applications exploded. Ericsson is taking further steps to accelerate this process by establishing a Wireless Internet Solutions division to promote content via cell phones. Michael Ward is Director of Research and Mido Shammaa is a Research Analyst at International Assets Advisory Corp. Both developed the International Assets NETDEX, the first global Internet stock index. Their Global Internet Stocks column appears every Monday. Go to www.worldlyinvestor.com to see all of our latest stories.