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Technology Stocks : MRV Communications (MRVC) opinions? -- Ignore unavailable to you. Want to Upgrade?

To: Mike I. who wrote (7267)	2/25/1998 9:27:00 AM
From: Sector Investor	Respond to of 42804

This should help a lot MRVC: View 17% Sell-off Unjustified; 07:41am EST 25-Feb-98 Bear Stearns (Blachno, E/Lam, B 212/272-4227) MRVC Eric Blachno (212) 272-4227 February 25, 1998 Bob Lam, CFA (212) 272-7670 Subject: Analysis of Sales/Earnings Industry: Data Networking BEAR, STEARNS & CO. INC. EQUITY RESEARCH MRV Communications (MRVC - 23 15/16) - BUY View 17% Sell-off Unjustified; Reiterating BUY Rating ----------------------------------------------------------------- *MRVC shares sold off (down 17%) after the company reported Q4 results apparently due to concerns over its higher than expected Day Sales Outstanding (DSO) and inventory level. We believe the sell-off was not justified and are reiterating our BUY rating on the stock based on the following reasons: 1. DSO Should Decline In Q1. Day Sales Outstanding DSO increased to 89 days in Q4 from 76 days in Q3, primarily due to higher mix of international customers (65% compared to 58% in Q3), which generally demand longer credit terms. International sales increased by 29% sequentially, while domestic sales were down 4% sequentially (due to lost OEM sales) in Q4. We believe that with enhanced sales and marketing capabilities (Selling & Marketing headcount increased by almost 30% sequentially in Q4), MRV's domestic sales should improve quite significantly in Q1 and the company should achieve lower DSO in Q1. We expect the DSO to decline to 80-85 days in Q1. 2. Inventory Should Decline In Q1. During Q4, inventory in absolute terms increased by $18 million to $42 million from $24 million in Q3, due to the company's effort to shorten lead times (an impact of approximately $6 million), the ramp-up of new products such as NH 2048 and GFS 3012 ($4.5 million), and lost OEM sales ( $3 million). However, we believe the increase in inventory in Q4 was mostly a one-time event and should not be viewed as a beginning of a trend. In fact, we expect inventory level to improve markedly in Q1 (likely to be down by $7-8 million) as inventory is reduced for OEM sales and new products. 3. MRV continued to deliver: Q4 was the company's 31st consecutive quarter of sequential growth in revenues. The company achieved 15% sequential revenue growth and 7% sequential EPS growth in the quarter. Going into 1998, we believe the company will benefit from an expanded product line (through its Xyplex acquisition and internal development), growing sales force (through hiring and acquisitions), and a higher gross margin (which will likely be offset by increased spending on R&D and Selling & Marketing). 4. Significant New Product Cycle in Switching. We believe MRV is in the midst of a new product cycle in switching with volume shipments of one of the industry's most comprehensive 10/100 workgroup switching offerings including the 16-port NH 2016, 24- port NH 2024, and the industry's highest port-density 48-port NH 2048. Moreover, its Gigabit Ethernet switch offering, the GFS 3012, should position the company well not only in the enterprise backbone environment, but also in the ISP (Internet Service Provider) market given the product's unique long-distance transmission feature (up to 100 km). In fact, the GFS 3012 has recently won the coveted COMNET New Switching Product Award for 1998. In addition, the company appears to have benefited significantly, and is poised to continue so going forward, from the release of switching modules for the Gigahub - the high-end modular hub platform obtained through the purchase of assets of Fibronics in 1996. 5. Xyplex Acquisition Could Provide Upside. We believe the recently-completed Xyplex's acquisition should broaden MRV's product line and provide the company's entry into the WAN access market. We believe Xyplex has good remote access and routing software products, which complement MRV's existing products (switching and fiber optics) to offer total networking solutions to both enterprise and service provider customers. Moreover, we believe Xyplex is currently developing a next-generation high-end remote access concentrator with strong authentication, encryption and access control capabilities (similar to Bay Networks' New Oak extranet router), which could allow MRV to benefit from the growth in that lucrative market segment ($1 billion market by 200 according to Forrester Research). Furthermore, we believe MRV is acquiring a pool of good engineering talent particularly in remote access and routing from Xyplex, and a strong field sales force, which should help the company particularly in the U.S. *MRV is trading at 19.2x and 13.7x our 1998 and 1999 EPS estimates, respectively. With a 3-year growth rate of 40%, we believe the stock is undervalued and are reiterating our Buy rating on the stock. ----------------------------------------------------------------- MARKET CAPITALIZATION: $ 682 million SHARE COUNT: 28.4 million shares EARNINGS Q1 Q2 Q3 Q4 Mar Jun Sep Dec Year P/E Current 1997 $0.19A $0.21A $0.23A $0.25A $0.88A 27.3x Current 1998 $0.26E $0.30E $0.32E $0.37E $1.25E 19.2x Current 1999 $1.75E 13.7x ----------------------------------------------------------------- Companies Mentioned: MRV Communications _______________________________ Within the past three years, Bear, Stearns & Co. Inc. or one of its affiliates was the manager (co-manager) of a public offering of securities of this company and/or has performed other banking services for which it has received a fee.