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Technology Stocks : BAY Ntwks (under House) -- Ignore unavailable to you. Want to Upgrade?

To: chris krusie who wrote (3063)	12/11/1997 9:29:00 AM
From: bayhead	Read Replies (1) \| Respond to of 6980

Per your request..... 09:22am EST 8-Dec-97 First Albany (Matt Barzowskas 617-228-3512) BAY WFLT SNPX BAY: Raising Rating to Buy from Neutral [FirstCall Notes 12/08] December 8, 1997 Previous Research Flash: 10/15/97 F A C/ Equities A division of First Albany Corporation INSTITUTIONAL EQUITY RESEARCH FLASH Rating Change Bay Networks, Inc. (BAY) Primary Analyst Matt Barzowskas - (617) 228-3512 Rating Buy FY Jun Price $28 15/16 52-Wk Range $41 7/8-$15 3/8 Shares Out. 198.9 mil. Avg.Dly. Vol. 2856485 Market Cap. $5,755.7 mil. Debt/Capital 0.0% Div. Yield 0.0% EPS reflect 3-for-2 stock split paid in November 1995. EPS numbers may not add up due to rounding. 3-Yr EPS Gr. 25% Raising Rating to Buy from Neutral We are upgrading our rating on Bay Networks to Buy from Neutral. We have growing confidence in the company's potential to continue to produce solid earnings and produce positive year-over-year comparisons. Management has been in place for a year now and has built a solid base to enable the company to take advantage of the upturn in networking during 1998 with a number of new products including its Accelar line and BayStack products. New products now account for almost half of the company's revenue. We are comfortable with our earnings estimate of $0.26 per share for the upcoming quarter and are more confident with our full-year estimate of $1.12 for FY 1998. With the upcoming positive year-over-year earnings comparisons and the potential for upside earning surprises, the stock should reflect a valuation that is slightly higher than its long-term growth rate. We are currently estimating growth of 25% per year. The stock should trade at 30 times our calendar 1998 estimate of $1.35 or $40 per share. With this price target we are rasing our rating to Buy. Over the past year, management has moved the company from a rudderless boat to one that has a full head of steam. Management has changed the attitude of employees, recaptured its customer base, and has introduced a string of popular new products. We think the networking market is poised to show solid growth in 1998 and Bay has positioned itself to take advantage of this growth. We are more confident with our earning estimates for this year and next as demand for its low-end switch, the 350T, has been a solid winner. This has been reflected in the most recent market share numbers, showing Bay increasing its share to 13% this quarter from 8% three quarters ago. In addition to its solid revenue growth, the company has the opportunity to improve its financial model with rising gross margins and expense control. With the turnaround in the company, visibility with current business is high and the quarter is much more linear. Bay is building momentum while a number of its competitors are struggling. On top of this, the company has introduced its Accelar routing switch product family, which should be a solid product for backbone upgrades. Finally, even with its struggles over the past year and a half, Bay has been able to maintain a loyal installed base of customers and is now in a position to fill pent-up demand and their future needs. Concerns The new management team has rejuvenated the company, in our view. However, management now must move beyond just getting back to a point where it should have been a year ago to accelerating product development and expanding its customer base. Competition is intensifying at the high end of the market with Cisco and the low end of the market with 3Com. Bay has had the opportunity to sell a hot product (350T switch) without much competition. The landscape has recently gotten much tougher with Cisco and 3Com introducing solid products. The company has remained aggressive on pricing. This has helped it maintain its installed base of customers, but it does put gross margins at risk. We are forecasting margins will gradually move back to levels more consistent with the rest of the industry, but we think pressure exists. More information is available on request. The material herein, while not guaranteed, is based on information believed reliable and accurate. It is not to be deemed an offer or solicitation on our part with respect to sale or purchase of any securities. Our corporation or its officers, directors, or stockholders, or members of their families, may at times have a position in the securities mentioned and may make purchases or sales of these securities while this report is in circulation. Due to differing disciplines and criteria utilized, our quantitative and fundamental analysts may have differing opinions on these securities. Should you have any specific investment questions, please contact your First Albany Investment Executive. Our main office is located in Albany, NY. First Albany Corporation, Member New York Stock Exchange, Inc. and other principal exchanges.