In case anyone missed it...what a great article!
canada-invest.com
TECHNOLOGY
Tech Stock of the Year
Wed, Dec. 27, 2000 00:24
By Maria Babbage, Canada-iNvest.com
It may be hard to believe, but sometimes finding success can be as simple as turning on a switch.
At least, that’s what happened this year with NHC Communications (NHC), one of the best performing Canadian stocks of 2000, and the legitimate holder of the title, tech stock of the year.
The Montreal-based company, which makes data and telecommunications equipment surprised investors and analysts with its unheard-of growth from its 52-week low of $0.08 a share, just before the close of 1999. NHC reached its year-high of $22 on March 14. From one end extreme to the other was a 27,400% rise.
Of course, like many other companies, NHC got caught in the high-tech slam-dance and has slowed throughout the rest of the year to its current price of $9.65, as of Dec. 19. Still, if you had bought NHC at the beginning of 2000 at $0.25, you would be ahead by more than 3,000%
Its biggest product is the Virtual Cross-Connection System (VCCS), a copper cross-connect switch used in telecom systems which connects regular telephone lines to Digital Subscriber Lines (DSL), allowing for enhanced, high-speed Internet services though regular phone lines.
Aimed at high-speed data service providers including Competitive Local Exchange Carriers (CLECs) and Incumbent Local Exchange Carriers (ILECs) like Bell Canada (BI), NHC announced a number of major contracts this year, including the largest in its history with a yet-unnamed U.S. ILEC in early December.
NHC sales have skyrocketed this year, reporting a year-over-year increase of 204% for the company’s fourth quarter and 169% for the first quarter 2001. Though currently trading at the $11 mark, Groome Capital analyst Chris Bonnet thinks the company could achieve $33 over the next 12 months.
“They’re one of the very few providers of this type of technology in the world—there’s just a handful of them. It’s a growing space,” he says. “It’s the type of equipment that’s needed for the deployment of DSL. DSL inherently has a lot of problems in deploying it cheaply and this resolves one of those problems.”
Bonnet says NHC’s stellar performance has a lot to do with its decision to develop a new product for the lucrative DSL market.
“They’ve had a long history of underperformance and the stock went down to a low of $0.08 just before the end of last year,” he says. “They were involved in other product categories, and they announced throughout the year that they were developing this new product for the DSL market, which is the product they’re selling now. And many investors said, ‘Yeah, yeah, whatever. We’ll believe it when we see it.’ The stock continued to tank. They had a few incidents; they had a lawsuit that they had to resolve, which has been resolved.”
He says the big turnaround came after management announced they would manufacture the product in January with an initial order of about $25-$26 million. Investors started linking NHC to its closest competitor, U.S.-based Turnstone (TSTN), whose stock had spiked to the $200 mark at one point. In the end, they started rewarding the company with the same confidence they had in Turnstone.
Now NHC is poised to surpass its rival, developing products aimed at bigger players than Turnstone, which mainly caters to CLECs.
“(NHC has) designed a matrix switch that has a higher density, so they can connect more telephone lines to other services, such as DSL. So this matrix switch can connect up to 5,000 lines at a time, whereas their competitors cannot. And what this means is, that they’ll be able to sell their switches into the large telephone companies,” Bonnet explains.
“So let’s say a small CLEC—a competitive local exchange carrier—needs a box that has 200-300 lines by 300 lines, because their customer base in each central office is not very large, so they only need a switch that can do a moderate amount of lines. But if you’re selling to a Bell Canada or Sprint or so forth, they have maybe 50,000 lines that they want to connect, so they want the biggest switch possible to connect as many people in one shot. And NHC so far has the only switch of that capacity.”
Though sales slowed a little in the last quarter, he says the company will really start growing in the third or fourth quarter.
“Looking forward in the next year or so, we think that they’re going to sign a few contracts with the large carriers, the ILECs. And there’s no competition right now. But the problem with that is that it takes traditionally longer to sell to an ILEC than to a CLEC. They mull it over, and they test it and it takes maybe six to eight months to finally get an order from them, whereas a CLEC may decide in a couple of weeks or a month. So that’s what we’re expecting next year.”
Taking all these factors into account, Bonnet believes the stock will continue to perform well in 2001.
“It doesn’t take many contracts for them to grow substantially. A typical contract may be $25-$50 million over the course of three years. So each contract is with a service provider, a CLEC or an ILEC, like a Bell Canada or something, or an AT&T in the States or one of the smaller ones. And each one of those contracts could involve a piece of equipment that ranges from, I’d say, $30,000 to $70,000 per unit, in as many as 1,000 or 2,000 central offices. So it can grow pretty quickly. And once they choose that type of equipment—whether it’s from NHC or one of their competitors, it’s sort of like betting on, let’s say, a computer platform or something. You’re having it deployed in all of your offices.” |
