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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Judith Williams who wrote (33951)	10/28/2000 12:46:17 PM
From: the dodger	Read Replies (1) \| Respond to of 54805

Judith, Bruce, Mike, Sditto -- somebody help me out here. I'm certainly no accountant. I own some JDSU -- but I'm having a problem seeing where the $$$ is going to come from to fuel their long-term growth -- and therefore, am starting to question their current valuation. Am I missing something? Is my logic fuzzy? Are my numbers bad? Like I said -- I'm no accountant, but here's what I'm looking at... I went to Quicken.com and looked at the Telco/wireless industry and the equipment supplier industry. I looked at the 50 largest companies world-wide (according to Quicken.com) in both groups. And I'm guessing these two groups probably do about 75-90% of ALL the telco & supplier business on a world-wide basis. First... The telephone companies -- T, AWE, VOD, VZ, AWE, etc... It looks like the top 50 telco/wireless carriers have a combined market-cap of about 2.1 trillion. Quicken says the group has a Price/Sales ratio of about 5.5 -- so their combined estimated revenue should be around 385 billion. The equipment suppliers -- JDSU, SDLI, CIEN, HLIT, etc... And it looks like the top 50 telco equipment makers have a combined market-cap of about 1.1 trillion. Quicken says the group has a Price/Sales ration of about 25.5 - so their combined estimated revenue is about 43 billion. Here I assume a relationship -- I think it's fair to say that the suppliers' 43B in revenue is coming mostly from the carriers' 385B revenue. That means the suppliers are getting about 11% of the telcos' revenue. And while capital expenditures don't necessarily come from a company's revenue -- they could borrow $$$ or do a secondary offering to finance expansion -- I think it's logical to assume there is at least a relationship between a company's revenue and the amount it's willing to spend on equipment purchases. The point is, I think the tele-supplier industry is dependent on the tele-carrier industry to do three things -- borrow $$$ -- do secondaries -- or grow revenue. So let's look first at the telco/wireless ability/willingness to borrow -- Quicken puts their total-debt / total-equity ratio at 1.18. Generally speaking, I think most analysts consider anything above 1 as unhealthy for a company. The S&P500 currently stands at about .85 -- so using them as a model, the telco/wireless sector looks over-extended by about 39% (1.18/.85) already. And it's difficult to borrow & spend your way to prosperity -- the dot.coms certainly proved that. Another example: TWX is large highly regarded yet highly-leveraged company -- it's debt/equity stands at about 1.8 -- but there's a cost to that -- it only has a price/sales ratio of about 3.3 -- that's some 60% below the telco-wireless sector. Yeah, different industries, blah, blah, blah -- but long-term, Mr Market will eventually demand a healthy balance sheet -- he always does -- (look what happened to PSIX). So what about secondary offerings? It's hardly worth discussing, because I don't see how you can't get below a 1-to-1 debt/equity ratio that way. Plus, any meaningful secondary means dilution and absolutely clobbers your current stock price. So this brings us back to the telco-wireless revenue. It looks to me like the telco-wireless industry is going to have to grow revenue in a big way to keep financing their build-out. And here's where info at the financial sites get a bit fuzzy -- and almost meaningless -- and I'm referring to their past and future estimated growth rates. There seems to be no distinction being made between organic and inorganic growth in the estimated figures I find. I think this is important because it seems to be mis-leading. Why? -- Example: Let's say an entire industry is made up of only two companies -- company A and company B. If company A and company B are the same size revenue-wise, and company A buys company B -- then they are seen by analysts to have "grown" revenue by 100%. And while it may be true that company A is now a 100% larger. But did the industry grow a 100%? No -- because that industry is STILL the same size on a revenue basis. And it's the total size of the telco-wireless revenue that's important to its suppliers -- because that's where they are apparently going to have to feed. And it looks to me like the organic revenue growth in the carrier industry is somewhere around 12-13% and SLOWING. So unless we totally suspend the laws and principles of math, accounting, and common sense -- telco-wireless revenue, growth-rates, and market-multiples and their suppliers' revenue, growth-rates, and market-multiples will eventually gravitate towards one another. To me, it seems the only real question when will this happen -- and I guess this down market is making me feel like it may be sooner than later. td PS -- plus, none of this takes into account the huge financial drain the $100 billion+ spectrum auctions will have on the wireless sector -- and it all indirectly comes out of the telco vendors' trough.