C-COR.net (NASDAQ: CCBL - Quotes, News, Boards), a fiber optics products
manufacturer for the cable TV industry, is on the march. In the last month, the stock has
risen 35%, to $45.50 per share from $33.66.
A number of analysts, including Seth Spalding, vice president of broadband
communications at C.E. Unterberg Towbin, think the shares could reach the mid-$50s
soon.
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Spalding has called C-COR.net the ?arms supplier to the broadband battleground.? The
company supplies almost all of the products and services needed to plan, design, build,
and maintain a hybrid fiber/coaxial cable (HFC) broadband communications network,
contracting those abilities out to cable operators. Spalding estimates that the broadband
access infrastructure market could develop at a 34% compound annual growth rate over
the next four years.
C-COR.net derives revenue not only from almost every segment of the broadband
equipment continuum, but also from servicing that infrastructure. In addition, last year
C-COR.net made two acquisitions that have entrenched the company even more deeply
into what Spalding calls the ?broadband ecosystem.?
In its present form, C-COR.net is divided into three segments: C-COR Electronics, which
represents the original division of the company, and the two acquired companies, Silicon
Valley Communications and Convergence.com.
Operating in what Spalding calls the electronic distribution products segment, C-COR
Electronics designs RF (radio frequency) amplifiers, which boost transmission signals
along hybrid fiber/coax cable networks. This division also makes AM (Amplitude
Modulation) fiber optic equipment including mainframes, transmitters and receivers, as
well as head-end and node products, which basically get your Yankees game from the
cable plant to the telephone pole, and finally to the cable jack in your house. C-COR
Electronics also provides computer systems to run and monitor these operations.
The Silicon Valley Communications subsidiary anticipated the explosive demand for
cable modems in 1994, and has focused on making Dense Wave Division Multiplexing
(DWDM), bi-directional transmission products for cable companies ever since. This
opens the broadband cable pipe to and from the home to two-way data traffic.
Specifically, Silicon Valley Communications' products include optic nodes, transmitters
and receivers, which complement C-COR Electronics' offerings.
Bringing its DWDM expertise to the table, Silicon Valley Communications joined with the
electronics division to roll out two new cable transmission devices, called the mux-node
and the mini-node, which dovetail neatly with the architecture chosen by most cable
companies to upgrade their systems.
The third piece of the puzzle came in the form of Convergence.com, a private broadband
services integrator that oversees the operation and support services of C-COR.net's
massive infrastructure. The unit is a 14,000 square foot control center where engineers
monitor the company's Internet and data-over-cable installations throughout the world
(picture the NORAD room in ?War Games?).
C-COR.net has announced the acquisition of yet another unit, Worldbridge Broadband
Services, which will broaden the company's technical service presence throughout the
U.S. In addition, the merger will add 230 engineers to C-COR's workforce and increase its
customer base.
So who's buying what C-COR.net is selling?
One of C-COR's biggest customers is Time Warner (NYSE: TWX - Quotes, News,
Boards). In the past, C-COR has derived a large chunk of its revenue from this
relationship: 36% in 1997, 31% in 1998, and 28% in 1999. The companies announced
Monday that C-COR will develop a pilot test in Time Warner's Tampa 900,000-subscriber
service area, in which the company will steeply ramp its Integrated Services Management
presence. This represents a significant opportunity for C-COR to prove itself for even
larger-scale projects, and to deepen its relationship with Time Warner.
?Time Warner has 12.6 million subscribers,? explains analyst Lawrence Harris of
Josephthal & Co. He describes C-COR's mission in Tampa as essentially setting up a
network management system akin to those of a telecom company. ?If your phone goes
out, it shows up at the telephone company. But up till now, if you lose your HBO, the
cable companies just send trucks around until enough people complain, and they
pinpoint the problem that way.?
As Time Warner upgrades its offerings to video on demand and telephony, those kinds of
outages will no longer be tolerable. ?This order could lead to further operational
deployment in other locations,? he says. ?We're excited about C-COR's prospects.?
AT&T (NYSE: T - Quotes, News, Boards) is another large customer. The telecom giant
hired C-COR to supply mini- and mux-nodes for a $1.8 billion upgrade of TCI's analog
cable plant. Spalding reasons that the upside from the AT&T contract could be immense.
He estimates that for each head-end (which supplies service to 187,200 homes), a cable
company will need about 13 hubs, 208 mux-nodes, and 2,496 mini-nodes.
After AT&T completes its acquisition of MediaOne this spring, it will have 15.7 million
subscribers. To upgrade a cable plant that vast would require about 209,000 mini-nodes
and 17,000 mux-nodes. With their foot solidly in AT&T's door already, C-COR stands to
be a prime beneficiary of the upgrade.
In mid-March, C-COR.net announced the acquisition of Finisar, an optical component and
module supplier. Finisar technology will add digital return capability to C-COR's mini-node
? what Spalding calls ?a key element of AT&T's next-generation broadband infrastructure
deployment.? The technology will allow much higher bandwidth to be allocated to smaller
groups of users, which will in turn help enable high-quality telephony and targeted
broadband content.
Helped further by a recent $33 million product order for Adelphi, C-COR's balance sheet
looks very healthy going forward. ?They've got $100 million in cash and only $1.8 million
in debt. The recent interest rate hike could work in their favor in the form of interest
payments,? says Harris. He notes that, since tech stocks generally seem to be in a
correction these days, C-COR may be afforded a pull-back ? ?a great time to invest in a
quality stock,? he says. Early Tuesday, Harris reiterated his ?Buy? rating on the stock,
upping his price target from $50 to $55 per share.
In a recent report, Spalding reiterated his ?Strong Buy? rating with a $52 price target, and
opined that the fiscal third-quarter (ending March 31) is ?tracking well,? and that the
company should meet or beat both his top and bottom line estimates. He estimates the
company will earn $0.11 per share from revenue of $62.2 million, representing a 32%
year-over-year revenue growth, and 345% year-over-year EPS (earnings per share)
growth. On top of that, he sees the company reporting a ?very strong? book-to-bill ratio,
based on ?robust demand.?
?We believe that C-COR should be a core holding in the broadband infrastructure market,
and reiterate our ?Strong Buy' rating,? Spalding adds. ?The product development
partnership with Finisar places C-COR at the cutting edge of Hybrid Fiber/Coax
technology.?
Based on a trading price of $39.94, Spalding says, ?Currently trading at six times fiscal
2000 estimated revenues, a P/E (price-to-earnings) growth multiple of 1.1, C-COR
remains at a significant discount to its closest peer, Harmonic (NASDAQ: HLIT -
Quotes, News, Boards), which is trading at 15 times our fiscal 2000 revenue estimates,
and 2 on a P/E growth basis. On an operating basis, the two companies share similar
profit margins, and are both playing into the same high-growth opportunity.?
Bottom Line:
C-COR.net is an undervalued jewel in the broadband infrastructure space, and
the stock remains a bargain, especially on any market-related pullbacks.
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