The Wall Street Journal Interactive Edition -- February 26, 1998
Best Five-Year Performer
For Tellabs, It's All in the Timing
By JAMES P. MILLER
Staff Reporter of THE WALL STREET JOURNAL
Because Tellabs Inc. came up with the right product at the right time, its stock turned out to be the
right place for investors in recent years.
The Lisle, Ill., telecommunications-equipment maker won the Shareholder Scoreboard's slot for top
five-year performer thanks in large part to the phenomenal success of a product known as the Titan
5500.
Tellabs spent heavily to develop the "digital cross-connect" equipment, which phone companies and
other customers use to manage traffic on their high-speed fiber-optic networks. The Titan line was
introduced in 1991, just as deregulation in the telecommunications business was spurring Tellabs
customers on to a competitive burst of capital spending.
The product "came out just at the right time," says SoundView Financial Group Inc. analyst Chandan
Sarkar. As the industry it serves was gearing up for an expansionist spending spree, he notes, Tellabs'
design was swiftly accepted by many regional Bell companies and long-distance carriers. Tellabs
competitors, he adds, "had built products that were either too large or had the wrong set of features."
With rivals in once-separate fields, such as long-distance service and cable TV, trying to protect their
turf and invade others', telecom today is "a war of everybody against everybody," says a Tellabs
spokesman, "and Tellabs sells them the ammunition."
RBOCs, IXCs and CLECs
Rife with acronyms only an engineer could love, the telecommunications-equipment business can be
confusing for investors. But if the nuances of Sonets (synchronous optical networks), RBOCs, IXCs,
CLECs, DS1/E1 circuits and densewave multiplexing are difficult to grasp, the sector's lucrative
growth is plain to see. Stocks in the group turned in an average compound annual total return of 33.9%
over the past five years, a performance that trailed only the oil-drilling, semiconductor and
securities-brokerage sectors.
Tellabs' performance far exceeded that of its sector, however, delivering an average compound annual
total return over five years of 91.3%. A $1,000 investment in Tellabs made at the end of 1992 was
valued at about $25,620 at the end of last year.
"Timing, timing, timing," says Robert W. Baird & Co. analyst Theodore J. Moreau. The sector had
been undervalued in the late 1980s, but investors began to award higher price/earnings ratios as the
'90s got under way. That set up Tellabs, riding the industry's surge and its own marketplace success,
for "the classic investment scenario: accelerating earnings on a rising valuation," Mr. Moreau says.
The Titan line rang up sales of $14 million when it was introduced in 1991, $163 million in 1994 and
about $617 million last year. This year, some analysts expect the line to yield about $775 million in
sales.
The Titan Question
The product is a textbook success. But will it prove to have legs?
"That's the $64,000 question," says Mr. Moreau. "That's what everybody is asking, and that's why the
stock has been under pressure" in recent months. While Mr. Moreau expects the company's historical
30% revenue growth rate to continue, and he still assigns Baird's top "buy" rating to Tellabs shares, he
notes that the stock is "not as undervalued as it was a while back."
Tellabs, which draws nearly a third of its revenue from offshore markets, has been pinched recently
by unfavorable currency translations, and its fortunes also depend to an extent on phone companies'
capital budgets.
At bottom, however, "the only issue for Tellabs," says SoundView's Mr. Sarkar, is that "it's been kind
of talked about as a one-trick pony. Eventually, any product will run out of steam." Nonetheless, he
continues to rate the stock as a buy. "We still love it," he says. "It's still our favorite stock in the
sector."
The Coherent Deal
Mr. Sarkar had expected the company to enhance its technology portfolio through acquisition, and last
week Tellabs did just that, by agreeing to pay about $670 million in stock to acquire rival Coherent
Communications Systems Corp., an Ashburn, Va., maker of telecommunications equipment that
derives three-quarters of its sales from the international market.
The move is in line with a successful global strategy being pursued by Michael Birck, Tellabs'
president and chief executive officer. In 1993, Tellabs acquired a tiny Finnish telecom-equipment
maker known as Martis Oy. The Finnish company's product, geared to the communications standards
that prevail outside North America, had sales that year of $35 million, notes Mr. Birck. "We've
managed to grow those revenues to $300 million," he says.
Speaking of the "strategic plus" the Coherent purchase represents, he says: "In this era of convergence
in the telecommunications industry, the ability to bring the latest technology to global customers in the
shortest possible time is the key to growth."
Mr. Birck, one of five executives who broke away from a Chicago-area company in 1975 to co-found
Tellabs, says, "We spend an awful lot of money on R&D, and we try to leverage it." Tellabs'
research-and-development outlays have been steep, even by the standards of its high-tech industry.
Last year, research expenses climbed 47% to $158 million, a hefty 13% of sales.
The development program includes extensive upgrades of the crucial Titan line, as well as efforts to
move into new areas, such as the fledgling Cablespan product, which Tellabs expects to sell to
cable-TV networks that want to deliver telephone service.
Is the high-growth phase over? "I don't think it is," Mr. Birck says. "We've been through the easiest
part of the growth," he concedes, "although we didn't think it was so easy at the time." But for Tellabs,
he says, the "market opportunities are undiminished."
Return to top of page
Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved. |
