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Strategies & Market Trends : Market Gems:Stocks w/Strong Earnings and High Tech. Rank -- Ignore unavailable to you. Want to Upgrade?

To: Laurren who wrote (102995)	6/19/2000 9:19:00 PM
From: puborectalis	Respond to of 120523

Humming Along in Optical Networking By Marc H. Gerstein Market Guide, Director of Investment Products HARMONIC (HLIT) appeared in a screen designed to find companies whose earnings per share came as a pleasant surprise to analysts and resulted in upward estimate revisions. Looking just at the numbers, HARMONIC passed the test. Usually, I want to infer from the track records that companies will continue to deliver on the bottom line, but I'm not sure I can do that with HARMONIC. But the issues seem short term, the sort of problems nobody will remember a year from now. These issues have already caused the stock to take such a pounding that we might be able to say the share price discounts all the potential negatives but not the positives. The end result may be a stock that looks interesting, even if for reasons unrelated to the theme of the data screen that called it to my attention. HARMONIC is a leading provider of optical networking equipment for cable networks. Its competitive position is enhanced by ownership of an important piece of intellectual property, DWDM (dense wavelength division multiplexing), which permits multiple wavelengths of data to move simultaneously along a strand of fiber cable. Growth in optical networking is being driven by competitive pressures that are forcing cable operators to expand the array of services they offer and the resulting need for two-way transmission of voice, video and data. That product line was augmented by the May 2000 acquisition of DiviCom from C-CUBE (CUBE). DiviCom is a leader in video compression technology, an essential component if video-on-demand is to become a reality. DiviCom presents attractive cross-selling opportunities since it and HARMONIC have different customers and each product line can be sold to the other's customer group. So why has the stock been beaten down from a high of $157.50 in early 2000 to close at $36.31 on June 15, 2000? Obviously, one factor was the Nasdaq correction that chopped many new economy stock valuations. Another factor was the slowdown experienced by DiviCom in first quarter revenue, a slowing that was more pronounced than seasonal factors alone might suggest. This was a lengthy and complex transaction that involved some internal restructuring within C-CUBE before the DiviCom division could be sold to HARMONIC. Division personnel should be able to continue doing business-as-usual and not be distracted by corporate upheaval. But DiviCom's employees are only human, and as it turned out, they were badly distracted. Fortunately, there's no indication of any change in the overall bright fundamental outlook for the business. Interestingly, DiviCom may help to solve the other HARMONIC worry ? customer concentration. In 1999, AT&T (T) accounted for 41% of revenue. In the March 2000 quarter, revenue dropped to 28% due to growth in sales to new customers. DiviCom, which approximately doubles HARMONIC's sales, will further cut the AT&T's percentage. Meanwhile, HARMONIC shares now have a PEG (price/earnings-to-growth rate) ratio of 0.76 when P/E is based on the 2000 consensus EPS estimate. The PEG ratio is a mere 0.59 when the 2001 EPS consensus estimate is used. That could turn out to be a major bargain if DiviCom settles back into a day-to-day business mode.