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Thursday January 4, 3:00 am Eastern Time
BusinessWeek Online
New Light on New Focus
The highflying fiber-optic group was one of the last sectors to be crushed by the Nasdaq rout late in 2000. And some analysts believe it would be among the first to rebound in a healthier environment for tech stocks. It may be premature to judge whether the Federal Reserve's surprise rate cut Jan. 3 will give the Nasdaq a prolonged boost, but it quickly offered some fiber-optic names a welcome respite from recent steep slides.
One such company is New Focus (NasdaqNM:NUFO - news), which makes high-performance components that go into fiber-optic networks and was one of 2000's most promising initial public offerings. It rocketed to a high of $165 a share in late July following its May IPO at $20 a share. Lately it has been bouncing wildly around between $20 and $40 a share. After falling 7 points, or 20%, to $28 a share on Jan. 2, it reversed course after the Fed's 50-basis-point rate cut on Jan. 3 to close at $32 1/2, a 17% rise. If the Fed's move renews your appetite for fast-growth companies still trading at dramatically reduced prices, New Focus is definitely one to consider.
Despite its stock price being so far off last year's highs, New Focus has numerous positives to boast of. In the fall of 2000, it announced major new customer wins, two acquisitions that will add to operating earnings, and the addition of low-cost manufacturing capacity in China. In October, it posted third-quarter results that trounced Wall Street estimates and included 76% sequential growth in sales to the telecom industry (it also sells high-tech tools for laboratory research). Analysts like its strong pipeline, which includes several ``next generation'' optical products due out this year.
IN THE PACK. New Focus' sales tripled to an estimated $73 million in 2000 from $23 million the previous year. They're expected to double in 2001 to $150 million and climb to $250 million the year after. The company is still losing money. It reported a net loss of $1.2 million, or 2 cents a share, on $22 million in sales in its most recent quarter.
However, it recently moved up the date when it expects to be profitable to the second half of this year -- six months earlier than previously expected. Thanks to rapid sales growth, better production yields, and the new low-cost manufacturing in China, gross margins are improving dramatically. In the third quarter, New Focus reported gross margins of 22.5%, up from 9.7% the prior quarter.
Of course, before you rush to purchase New Focus, it might be good to consider that it's just one of many newly public component makers vying with giant JDS Uniphase (NasdaqNM:JDSU - news) for a slice of the optical components business. Those stocks, including Avenex (NasdaqNM:AVNX - news) and Stratos Lightwave (NasdaqNM:STLW - news), have been hammered in recent months on expectations that telecom carriers won't spend as aggressively to build out their networks in 2001.
Yet despite all the negative sentiment, analysts see strong growth in the industry. Peter Chen, a senior analyst with networking researcher RHK Inc., predicts that sales of optical equipment for high-performance applications will grow at nearly a 50% rate a year to reach $24 billion by 2004, up from $5 billion in 2000.
CONFIDENT CALLS. New Focus CEO Ken Westrick says the company's strategy -- concentrating on a small set of innovative products for a select group of customers -- is paying off in continued demand. Although New Focus has been aggressively adding capacity, Westrick says he isn't concerned about whether that capacity can be put to use in the near term.
Wall Street has a great deal of confidence that New Focus will continue to exceed its ambitious targets. ``I would not be surprised to see our estimates continually going up substantially the next four quarters,'' says Jim Jungjohann, an analyst with CIBC World Markets. Although it's valued in line with other component makers based on its market cap-to-sales ratio, ``I have more confidence in estimates on New Focus than some of its peers,'' says Epoch Partners analyst Mark Langley.
``We have a lot of confidence that our estimates are, No. 1, achievable and, No. 2, beatable,'' says Conrad Leifur, an analyst with U.S. Bancorp Piper Jaffray. ``From a fundamentals standpoint, that makes this a safe play,'' Leifur says, adding that the stock was his top pick in December.
PROTECTION MONEY. He believes that as a smaller, growing company, New Focus may be somewhat insulated from broader market trends. ``We think that some of the emerging small companies can continue to grow at rapid rates as they bring on new customers and introduce new products,'' he says. This is in contrast to JDSU. ``As the biggest player, they are more broadly exposed and more vulnerable to any near-term weakness in the market overall,'' Leifur says.
That doesn't mean there aren't plenty of risks for New Focus. It's in a competitive area where there's a risk spending could slow. But it has very little debt and had $504 million in cash at the end of the most recent quarter, thanks to a well-timed August secondary offering that would provide some protection if conditions for its business decline.
``We tend to be conservative from a financial point of view and aggressive when it comes to running the business,'' says Westrick. Sounds like a good combo for investors who are willing to be aggressive with their own finances. |
