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Technology Stocks : Optical Networks and Components, DWDM and Tunable Lasers -- Ignore unavailable to you. Want to Upgrade?

To: BDR who wrote (224)	4/13/2000 8:21:00 AM
From: J Fieb	Read Replies (1) \| Respond to of 275

But the sector should stay attractive.... Wednesday April 12, 7:27 pm Eastern Time Individual Investor Internet: E-tek's Strong Quarter to Boost Fiber Optics Senior Analyst: Luciano Siracusano (4/12/00) E-tek Dynamics' (NASDAQ: ETEK - news) strong showing in its fiscal third quarter augurs well for the fiber-optics industry. The maker of fiber-optic components and modules increased revenue 24.9% sequentially to $90.6 million, an 89% advance from a year ago, earning $0.24 cents a share (excluding the amortization of purchased intangibles) versus $0.14 in last year's quarter. Although gross margins declined slightly in the quarter to 49.6%, operating margins widened to 28.7 % on a pro forma basis. The stronger-than-expected revenue and share profit growth underscores the blistering demand in the supply-strapped sector. Alcatel (NYSE: ALA - news) and Nortel (NYSE: NT - news) were E-tek's largest customers in the period, each accounting for more than 10% of net sales. E-tek, which is on a $360-million-a-year run rate, is expected to at least double its manufacturing capability in the coming year, and is rapidly expanding its capacity overseas. The company has invested in a new 300,000 square-foot facility in China that will produce isolators, couplers and wavelength division multiplexer (WDM) devices scheduled to ship by the third quarter of this calendar year. The company's goal -- to produce 50% of its product outside the United States - portends even greater margin expansion for E-tek's business over the long haul. Of course, the biggest factor weighing on both E-tek's business and its stock price is the pending merger with industry leviathan JDS Uniphase (NASDAQ: JDSU - news). Earlier in the month, both companies received requests for additional information from the Antitrust Division of the U.S. Department of Justice. One of the issues being weighed is whether JDS Uniphase's amalgamation of the largest optical filter producer (Optical Coating Laboratories) and the second largest packager of passive components (E-tek) will stifle competition in the industry. Reports surfaced in March that Alcatel, Europe's second largest telecommunications-equipment maker, had filed a complaint with the U.S. Justice Department spelling out its concerns that a ``single supplier' of key fiber-optics components could have adverse consequences for the rapidly growing industry. The next day, Alcatel released a statement disavowing newswire stories that implied it had filed any documents with the Justice Department opposing the merger. Most analysts following the saga believe that ultimately the deal will clear regulatory hurdles, probably by the end of the June quarter. JDS Uniphase faces strong competition in the ``active component' end of the market from SDL (NASDAQ: SDLI - news) and from energized fiber manufacturer Corning (NYSE: GLW - news). In February, Corning announced it was acquiring NetOptix, a maker of thin film optical filters, one of the key components for DWDM modules. Going forward, E-tek's business should only get stronger. First Union optical networking analysts Stephen Koffler and Lori Franklin see component manufacturers increasing revenue by as much as 40% per annum for the next five to seven years. They have ``strong buy' recommendations on both JDS and E-tek, with prices targets of $225 and $500, respectively. JDS shares were recently trading at $98.63. E-tek was recently at $179. Koffler and Franklin argue that these four merchant vendors may double their market share to as much as 60% of the component market from less than 30% today, suggesting that this increase will be ripped from the hide of ``captive suppliers' embedded inside companies like Nortel and Lucent Technologies (NYSE: LU - news). Although we doubt fiber-optic manufacturers can sustain multiples as high as 60 times revenues for the duration of this growth phase, we do see considerable upside from here for E-tek shareholders, provided that the acquisition goes through. (If it doesn't, expect a nasty sell-off - one of the reasons we do not advise playing the arbitrage game that currently exists between the two stock prices.) As part of JDSU, E-tek will have complete and cheap access to Optical Coating Laboratories' thin film optical filters, which means greater production and higher margins. Also, the convergence of so many talented optical engineers inside one company -- at a time when engineering talent is one of the industry's most supply-constrained resources - means that JDS Uniphase's will likely set the standard for the next generation of fiber-optic products. Like Moore's Law in the semiconductor industry, increases in demand for bandwidth propel ever more use of the light's full spectrum. As more powerful DWDM modules split light into more wavelengths, the number of related components multiplies within the optical network creating a bonanza for the fiber-optic suppliers. This is the reason why optical component makers will likely grow their top and bottom lines faster over the next five years than either the systems integrators they supply or the end customer -- the big telecommunications carriers -- who are today bankrolling this spectacular growth. Bottom Line: Expect continued volatility in E-tek's stock until the merger is finalized. If you already own it, hold. If you don't, use any Nasdaq sell-offs (like today's) over the next few weeks to load up on JDS, SDL, or Corning, all of which have retreated widely from their yearly highs. For more in-house professional stock analysis and commentary, visit us at Individual Investor Online. --------------------------------------------------------------------------------