DMC Stratex: Riding the Communications Wave
Research Analyst: Hal Levey (10/24/00)
DMC Stratex Networks (NASDAQ: STXN - Quotes, News, Boards) is
poised to ride the wave as the communications industry
explodes and demand increases for broadband and wireless
access.
And much like telecommunications companies offering high-
speed Internet access through existing phone lines, it will
do so using older, existing technologies: microwave systems
and radio.
DMC Stratex (formerly known as Digital Microwave Corp.)
designs and manufactures digital microwave solutions
for worldwide telephone network interconnection and access.
The company's microwave systems carry voice, data and
digitized video signals.
Last week, street-beating DMC Stratex reported earnings that
topped expectations. For its fiscal second quarter ended
Sept. 30, the company earned $0.15 a share. That's two
pennies above the Street's consensus estimate and
considerably higher than the $0.02 a share DMC Stratex earned
in the year-ago period.
Revenues were up 54% year over year, to $105.4 million in the
latest quarter.
Among other products, DMC offers the Altium radio platform,
which can be used as a complement or alternative to fiber
deployment. The company also sells the XP4 radio, a product
that can be reconfigured to work with different types of
software.
Shipments of the company's XP4 radios surged 160% in the
second quarter from a year ago, and Altium radio shipments
climbed more than 100% over the same period. In addition to
the supercharged growth at these lines and the jump in the
company's top-line growth, operating expenses as a percentage
of sales decreased in the most recent quarter to 20.6% from
27.2% a year ago.
Demand for the company's offerings remains healthy. DMC said
that during the second quarter, it received $132.5 million in
new orders, 86% higher than last year's tally. The backlog as
of Sept. 30 stood at $178.3 million.
After the stellar second quarter results were released last
week, several analysts trotted out strong ratings on DMC.
Dale R. Pfau of CIBC World Markets reiterated his "strong
buy" on the company, while Walter P. Piecyk of PaineWebber
ratcheted his rating up to "buy" from "neutral," with a $37
price target. Needham & Co.'s Rich Valera raised his rating
on the company to "strong buy" from "buy."
The company's shares have been on a tear, ending last week up
nearly 30% since the Tuesday announcement of second-quarter
results. Shares continued to move higher Monday after the
company announced it had secured a six-month $20 million
order from a major global telecommunications original
equipment manufacturer (OEM), unnamed by DMC Stratex, for
fixed wireless access networks worldwide. Shipments will
begin this quarter.
As of Monday's close of $23.88, DMC Stratex's stock trades
around 41 times the consensus earnings per share (EPS)
estimate of $0.59 for fiscal year 2001. That's a slight
discount to telecom peers such as Nokia (NYSE: NOK - Quotes,
News, Boards) and LM Ericsson Telephone (NASDAQ: ERICY -
Quotes, News, Boards) . But shares have some room left to
run. Despite the recent gains over the past several sessions,
DMC Stratex is trading at a significant discount to its 52-
week high of $48.50.
It's no secret the demand for wireless is running high,
especially as Internet access moves beyond the confines
of the desktop personal computer. Many developing countries
are building telecommunications infrastructures. Cell phones
are everywhere, it seems. The demand for fixed broadband
access networks is rapidly increasing due to data
transmission requirements resulting from growing Internet
access demand.
DMC said in its latest 10-K filing with the Securities and
Exchange Commission that it has sold over 163,000 radios,
which have been installed in 95 countries. And the company's
customer base includes some heavy hitters in the industry,
including Lucent Technologies (NYSE: LU - Quotes, News,
Boards) and Microelectronics Technology. DMC Stratex derived
79% of its fiscal year 2000 revenues of $300 million from
sales outside the United States.
The foreign market, while nascent, certainly appears
lucrative. The Strategis Group, a consulting firm, estimates
that the fixed wireless broadband sector is poised for
dramatic growth. Global service revenues are projected to
reach $16.3 billion by 2004, a compound annual growth rate of
140% over 1999 revenues. While North America will comprise
39% -- or $6.4 billion -- of the global market in 2004,
Strategis estimates, Europe, Asia and Latin America are
forecast to generate $4.1 billion, $3.0 billion and $2.7
billion in service revenue by 2004, respectively.
Bottom Line:
Demand for DMC Stratex Networks' products has been growing,
as evidenced by the company's growing top line and Street-
beating earnings. And that trend looks poised to continue as
foreign markets strive to update and, in many cases,
completely revamp their telecommunications infrastructures.
Source:
individualinvestor.com |
