In re, PWER and power supply industry. This is a way to get the gains of the telecom and internets with a margin of safety, the relative calm and steadiness of the power supply industry, particularly PWER which is by its new plan,(invest in us and you invest in the growth of our high-tech customers, the company says)is focused only on that segment of the power supply demand. If you take out the goodwill in the stock, its PE is down in the thirties, I remember reading.
<<Company Focus
2 companies that power the New Economy
Power-One and C&D Technologies make the power supplies, batteries and other components that electrify the wired (and wireless) worlds. Their stocks have been pumped up by the rise of the Internet and wireless communications.
By Michael Brush
Powering the Internet and communications networks means a lot more than just sticking a plug in the wall. Regular current has to be tweaked for telecom gear like switches and routers. Inside devices like these, the faster chips used nowadays have their own special needs. Then there is the backup-electricity supply system that always has to be on hand.
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All this explains why shares of companies that make telecom power-supply components have been moving up as much as fiber-optic stars, despite the fact that they get far less publicity. Though you probably won't ever overhear anyone talking power-component companies at the water cooler, leaders in the field getting very strong earnings-estimate revisions -- like Power-One (PWER, news, msgs) and C&D Technologies (CHP, news, msgs) -- offer a great way to diversify your exposure to the broadband build-out.
Sure, the shares of both companies have already enjoyed impressive runs. Power-One has advanced to around $80 a share from $10 a year ago. And over the same period, C&D Technologies has moved to about the same level from $30. But given the level of demand for their products, sparked by the continued growth in broadband and wireless services, analysts say there is still room for more -- barring a few potential pitfalls. Let's take a closer look.
Power-One
During the past three years, Power-One -- a Camarillo, Calif.-based manufacturer of power converters -- has been shifting its focus and making acquisitions to get a larger piece of the action in the data and telecom infrastructure build-out frenzy. The effort has paid off. This year, Power-One will get about 70% of its revenue, and most of its growth, from the communications market.
Customers include the likes of Cisco Systems (CSCO, news, msgs) (the biggest, accounting for 20% of sales), Nortel Networks (NT, news, msgs), Nokia (NOK, news, msgs), Ericsson (ERICY, news, msgs) and Williams Communications Group (WCG, news, msgs). But the company also sells to test-equipment makers like Teradyne (TER, news, msgs), whose demand for Power-One products can be traced back to the thirst for communications chips. (Slower-growth areas include industrial, transportation and medical-device markets.)
Catching the telecom build-out has helped Power-One boost revenue nearly 100% in the two most-recent quarters on a year-over-year basis. Order backlogs have powered up more than 60%. The company expects a tamer annualized sales growth of anywhere from 25% to 40% over the next three years, and the reason is simple. That's how fast the data and telecom industries are growing.
Power-One has three main product lines.
First, converters that change power from alternating current (AC) to direct current (DC) account for about a third of its sales. This tends to be a higher-volume, lower-margin business, so investors look for juicier earnings growth from the other two areas.
Second is "power plants." These are the large, standalone power converters that serve things like phone company central offices or wireless-cellular sites, and which produce about 30% of sales.
Last, the company gets about 37% of sales from "bricks," or much-smaller devices which covert DC into lower-voltage DC inside equipment like switches and routers.
Telecom equipment makers need bricks because faster-running chips in use today tend to use lower levels of voltage. "You can't bus those voltages long distances because the loss varies too much," says chief financial officer Ed Schnopp. "So you have to have a brick right at the point of load. This business has tremendous, tremendous growth. We are one of the premier suppliers."
The other big supplier is Lucent Technologies (LU, news, msgs), which helps explain why growth is so strong at Power-One. Once upon a time, networking-equipment makers did not mind buying power converters from Lucent. But as the networking industry has become more competitive, many have turned to Power-One.
Investors take note
Investors have noticed the changes at Power-One, doubling its stock price in just the past three months. Shares recently traded at around $80, giving the company a market capitalization of about $2.6 billion on trailing 12-month sales of $248 million. Is it too late to get in? "We feel that we are actually early in the growth stages of this company," says Steve Thorson, founder and president of Emerald Capital Management in Edmonds, Wash. The firm has held Power-One shares since March in its aggressive growth portfolio, up 72% before fees in the 12 months ending May 31.
Thorson selects stocks with a quantitative system that helps him figure out what qualities other investors are seeking so he can get in first. Power-One comes up strong in his radar system, so Thorson thinks the crowd could be driving its shares up another 40% over the next six months. "As these stocks begin to power up and gain momentum, you have this piling-on effect, and that is what drives them up more than anything."
Potential investors face a couple of risks. First, Power-One and others in the field are moving rapidly to meet demand. Will the sector suffer from too much capacity at some point? Second, Power-One has been expanding through acquisition -- a sensible strategy in such a fragmented field. There are more than 1,000 power-supply makers serving the $17 billion market. Acquisition stories, however, can be risky because buyers may have trouble fully understanding what they are purchasing, or integrating the new companies.
C&D Technologies
Selling batteries does not sound like a sexy business. But companies like the Blue Bell, Pa.-based C&D Technologies, which produce the lead-acid cells forever on standby to back up the nation's communications infrastructure, are actually having trouble meeting demand these days. The reason, of course, is the rapid growth in wireless, Internet and voice services.
"AT&T (T, news, msgs), the regional phone companies, the independents like Williams and MCI, they all have to build infrastructure. We are participating in that," says C&D chief financial officer Stephen Markert. "The amount of data working its way through the switches is creating a higher power demand, and backup-power demand." That explains why C&D sales in recent quarters have been growing by 55% to 65% annually.
The company earns about 72% of its revenue by selling power supplies that back up not only landline, wireless and fiber-optic systems, but also things like cable-television systems, nuclear-power stations and even the New York Stock Exchange. C&D's Powercom division makes batteries for the telecom industry -- which is required to have eight hours worth of backup power on hand. Its Dynasty division, recently purchased from Johnson Controls (JCI, news, msgs), backs up cable-television systems. If the convergence of voice, data and entertainment over the broadband cable pipeline ever takes off, the need for Dynasty products will grow in lockstep.
Because of overwhelming demand already coming in from the rest of the telecom world, C&D is in the midst of an aggressive capacity build-out. The company is spending more than $30 million this year -- which will increase production enough to bring in $100 million more in annual revenue. That's a 25% increase in sales for the two divisions that produce backup power supplies. "This is where the growth is coming from," Markert says. "We are very much involved in two extremely high-growth environments." Customers include Lucent, Nortel, Cisco and America Online (AOL, news, msgs).
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C&D also is nursing along a division that sells DC-to-DC power converters used in telecom switches, similar to the products bringing in big profits for Power-One. The division, known as Power Electronics, has been struggling. It lost $2 million last year but is now signing up new customers, in what looks like a solid turnaround. Analysts expect it to turn a profit this year and bring in more than $10 million in gains next year. A fourth division, Motive Power, is not seen as a big source of earnings growth.
Wall Street reluctant to jump in
C&D shares sold off sharply on big volume earlier this week, but stabilized at around $80 a share, for a market cap of about $1.1 billion on trailing 12-month sales of $499 million. One thing that helped bring the stock around was an increased earnings estimate. But don't expect too much support from Wall Street with this company. Though new coverage may be in the cards, brokerage houses have little interest in picking up the stock. Since C&D is self-financing, brokerages know their investment-banking divisions probably won't be getting any business out of the deal.
That does not bother Dana Walker, who follows the company for Delaware-based Kalmar Investments, which owns C&D shares in its Growth-With-Value Small Cap fund (KGSCX), up 27% in the trailing 12 months. In addition to positive trends in C&D's sector, Walker likes the firm's "no nonsense" attitude toward customers and Wall Street.
Sell-side analysts, for example, point out that the company's conservative accounting practices make it overreserve to the tune of about 5 cents a share in quarterly earnings. "They have an underpromise and overachieve mentality," says Walker.
Just the kind of psychology you would hope for in a company that makes backup power supplies.
At the time of publication, Michael Brush did not own or control shares in any of the equities mentioned in this column.
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