All, Barrons article:
April 9, 1998
ADC Shares May Be Ready to Roll Again
By VITO J. RACANELLI
ATLANTA, GA--That's gratitude for you!
For 28 consecutive quarters, ADC Telecommunications
met or beat Wall Street's earnings estimates.
For four years in a row, the Minneapolis-based maker
of high-speed data transmission products and
networking systems for telephone and cable companies
grew its earnings by more than a 30% annual clip.
And the stock's price quadrupled from around 10 in
1995 to the low 40s in early 1998, easily outperforming
the roaring S&P 500.
But on January 26th, the company warned analysts that
its earnings would be flat in the first quarter of the fiscal
year ending October 1998, principally because of a
sharp revenue shortfall in its copper broadband
connectivity division. That product, which connects
phone lines from residences and businesses to the
telephone company's network, is ADC's single most
important line of business, accounting for more than 20%
of its nearly $1.2 billion in revenues in fiscal 1997.
Clearly, slowing demand from Asian customers had hit
home. But so had the wave of merger activity among
telcos, such as WorldCom's megadeal with MCI, as
some parties delayed planned purchases until the
mergers closed. And since roughly half of ADC's 20
largest telecom customers were involved in some form of
merger or buyout at the time, momentum investors who
were in the stock decided to take their money and run.
After the stunning announcement, analysts figuratively
tripped over each other in their rush to slash estimates
and downgrade their ratings on ADC shares. A third of
ADC's market value instantly went up in smoke, as the
stock plunged nearly ten points on the news, closing at
around $19 a share.
But now some people are smelling opportunity in a stock that,
after seven fat years, is priced as if seven lean ones are
bound to follow. On March 20th, Piper Jaffray analyst Conrad
Leifur, who had been watching ADC for years but never followed it, initiated coverage of the company with a Strong Buy recommendation. His assessment: the pounding ADC had taken was simply overdone.
Leifur expects the core copper connectivity business to
rebound later this year as merged telcos begin buying
again to keep their networks up-to-date and competitive.
And, perhaps more importantly, the company has a
knack for developing new product lines, which diversify
its mix of businesses. Right now, ADC has high hopes
for a new broadband product for wireless companies
that generated lots of early interest from potential
customers. And even assuming continued weakness in
the copper connectivity business, Leifur estimates that
ADC can grow earnings at about 25% per year.
As does Wall Street, which now expects ADC to earn
$1.06 a share for fiscal 1998 and $1.34 in the fiscal year
ended October 1999, according to First Call. At
Thursday's close of 25 1/2, ADC's shares trade at
almost 19 times fiscal 1999's expected earnings, a nice
discount to its expected growth rate of 26% next year,
even after the stock's mini-rebound over the last two
months. Analysts expect ADC's earnings to increase at a
25% pace for the next few years as well.
Meanwhile, at least one firm, John G. Kinnard & Co.,
which downgraded the stock back in January, has
reinstated a Strong Buy recommendation, and some
institutions have once again begun to nibble at the shares.
Thomas Rowland, a fund manager at Wayne Hummer
Management in Chicago, says he "took a small position
when the stock cratered. It was a bit of a bump [for
ADC], but the longer-term market is still there." And
even though the stock has moved off its lows, he says, "I
expect I'll be nosing around again."
ADC's chairman and chief executive William Cadogan
struck an optimistic note at a Robinson Humphrey
conference here Wednesday, telling money managers
that there has been "a solid rebound" in the copper
connectivity business in the current quarter.
Nevertheless, he cautioned conference attendees that it
may take ADC a few months to bounce back
completely. "It will be about the end of the year before
we return to historic growth levels," he said, presumably
referring to ADC's traditional 30% earnings growth.
Cadogan added that he expects ADC to announce a
relationship with AT&T soon. He didn't elaborate -- and
couldn't be reached for comment -- but said ADC
would be increasing its business with the
telecommunications giant.
That would certainly be a good sign for investors betting
on a comeback. And with expectations lower, there's
less chance now for disappointment -- or more ingratitude. |
