TALES OF THE TAPE: Tellabs Readies For A Telecom Rebound
By ANN KEETON
Of DOW JONES NEWSWIRES
(This was originally published Friday.)
CHICAGO -- In the telecommunications industry, you can be a tortoise or you can be a hare.
Meet Tellabs, slow but steady in a volatile sector.
In the late 1990s, when others in telecom were racing ahead, "people were calling us a dinosaur," said Chairman and Chief Executive Michael Birck. His company makes optical networking and voice enhancement equipment for the telecom, wireless and cable industries.
The Lisle, Ill., company's Titan 5500 switch, which helps carry voice and data over telephone lines, led the industry. Quarter after quarter the company reiterated expectations of 30% annual top-line and bottom-line growth.
But in a marketplace dazzled by the promise of high-speed broadband technology, that wasn't enough. Tellabs was considered too slow at bringing new technology into its products.
In the end, however, a sour U.S. economy pushed many telecom speculators over the edge and the industry "suffered the worst downturn I've seen in 40 years in the business," Birck said.
Birck believes the sector hit bottom this year and can look toward recovery in 2003.
But analysts polled by Thomson First Call still see Tellabs losing money - five cents a share in 2002, with a four-cent loss in 2003. Over the next five years, analysts see the company's earnings growing by an average of 15% a year.
Birck won't comment on the analysts' expectations. "In the future, we may talk about trends, but giving earnings guidance to the penny is silly," he said. Tellabs hasn't discussed its financial outlook in recent quarters, he said, because "we really don't know."
Tellabs shares, which have been trading around $8 of late, were as high as $17.47 last Jan. 4, and as low as $4 on Sept. 30.
James Burkart, co-manager of the Strong Technology 100 Fund, believes the company is fundamentally sound, but given the weak industry he thinks the stock is a little expensive. "If it dropped to $6, I would look at it," he said. He doesn't hold Tellab shares in the fund now, although he has in the past.
Analyst Vivian Mamelak, at Natexis Bleichroeder Inc. in New York, agrees. Mamelak, who doesn't own the stock and whose firm has no banking relationship with Tellabs, said her neutral rating on the stock is based on its price. "A lot of telecom stocks have run up in the past few months," she explained. "If Tellabs got down to $6, I might rethink it."
However, Ted Moreau, an analyst with Robert W. Baird & Co. in Milwaukee, said the time to buy the stock is now. Late last month he reiterated his outperform rating on the shares, with a $12 price target. The analyst doesn't own shares and said his company has no banking relationship with Tellabs.
Tellabs' core business next year should benefit, he said, as more local phone companies follow BellSouth Corp. (BLS) and SBC Communications Inc. (SBC) in gaining Federal Communications Commission approval to provide long-distance service outside their home markets. Although he expects "a difficult carrier environment in 2003," Moreau sees mid-tier equipment companies like Tellabs picking up market share from financially beaten-down giants like Nortel Networks Corp. (NT) and Lucent Technologies (LU), both of whose shares currently trade under $2, as they trim their product lines.
Healthy, But Smaller
Tellab's balance sheet is strong, with $1 billion in cash, and no debt.
Still, the past two years haven't been easy. "We've cut the size of our business by 40% since 2000," CEO Birck said. In addition to closing factories, the company has outsourced other operations to save money.
The industry nose-dived just as Birck, a cofounder of the company and a respected business leader, was stepping back from day-to-day operations. He brought in Richard Notebaert, former chief executive of Ameritech, to replace him as chief executive while retaining the chairman post. When Notebaert left in June to take the helm at Qwest Communications (Q), Birck took back his old job. "I told the board I would stay two years" and that's still the plan, he said. Birck, who turns 65 this month, said he will have a successor ready when he retires.
Analyst Moreau said Birck's strong leadership last Fall has already led to a recovery in sales in international markets and better focus for the company's domestic business.
Product pricing is the crucial concern in his struggling industry, Birck said. He said Tellabs continues to look for ways to cut costs in order to maintain profit margins and he's hoping there will be no more layoffs - but can't say for sure that there won't be.
Birck said Tellabs should get good revenue and profit growth next year from outside the U.S. "Historically, we've gotten 30% to 35% of revenues from outside North America. Next year, it could be 40%," he said, with China, Asia and Eastern and Central Europe the strongest growth markets.
But analyst Mamelak sees Tellabs with flat revenue next year, following an expected 41% drop in 2002. Overall, she said, "The company was never a visionary, but it's still standing. It's in a good place relative to competitors."
Although it has other successful products, Mamelak said Tellabs is too dependent on the Titan 5500 switch. Even so, she said it will be a long time, maybe 20 years, before telecom giants can afford to replace those switches with more advanced products.
She said Tellabs might be able to add to its product line through acquisitions, but "the market doesn't think they're very good at it." She said some recent small acquisitions - of NetCore, an Internet-related business in 1999 and SALIX, a communications switchmaker in 2000 - have not worked well because of Tellabs' inability to mesh the different research and development cultures of the acquired companies.
"They're better off just sticking to their knitting," she said.
Birck said Tellabs isn't planning to manage its way to the future with acquisitions, and he's confident about the company's ability to innovate.
Slowly but steadily, of course.
-By Ann Keeton, Dow Jones Newswires; 312-750-4120; ann.keeton@dowjones.com
URL for this article:
online.wsj.com
Updated January 6, 2003 7:30 a.m. EST
Copyright 2003 Dow Jones & Company, Inc. All Rights Reserved
Printing, distribution, and use of this material is governed by your Subscription agreement and Copyright laws.
For information about subscribing go to wsj.com
used with permission of wsj.com |
