SmartMoney nice reference to MRVC
smartmoney.com
July 30, 1998
DAILY SCREEN
HIGH-TECH BARGAIN
HUNTING
IF WALL STREET is
capable (and it is)
of bidding up
stocks to insanely
high levels, then it
stands to reason
that investors are
equally capable of
selling stocks until
their prices are
through the floor.
So the question,
which should be
familiar to any
parent or money
manager, is: Are
we there yet?
If you look at the broader market as measured by the Dow
Jones Industrial Average or the S&P 500 (down a mere
4.4% and 4.5%, respectively since their highs earlier this
month), the answer is no. But for some stocks, both the
mood and the reality are decidedly bearish. Stocks with
market caps of less than $250 million have declined an
average of 43.3% from their 52-week highs, according to
Thursday's Wall Street Journal. And those with market caps
between $250 million to $2 billion are down an average of
25.4%. Make no mistake: That's a bear market.
Our "Market Jitters" screen is wired to pick up on some of
the volatility of the season, and, hopefully, turn over some
issues wrongly pounded in the current wave of pessimism.
For sure the technology sector must reckon with the larger
issues -- the evolving price war in microprocessors, the
uncertainty in the personal computer market, and the
continuing deterioration in Asia.
But our scan of the technology universe has uncovered 26
stocks worth reconsidering. These companies all have
decent projected earnings growth for the next three to five
years of around 30% on average, low debt-to-capital ratios,
and relatively low P/Es. And all are down in the past month.
There are some excellent issues here, including 3Dfx
(TDFX), a maker of graphics chips, down 13% at the end
of last week, and Ethernet switch vendor MRV
Communications (MRVC), down 5.16%.
Our pick though, is $424 million INTL. No, it's not the
ticker of chip giant Intel: Tiny Inter-Tel (INTL) of
Chandler, Ariz., makes private branch exchanges, or PBXs,
that route phone calls inside corporate networks, and the
telephone handsets that go with them. The company, which
is down more than 50% from its 12-month high -- is now
transitioning to the ultra-hot technology known as
voice-over-IP, whereby telephone calls are transmitted as
data packets across the Internet.
A recent call by Inter-Tel CEO Steven Mihaylo to a
SmartMoney reporter from Inter-Tel's own Internet
Protocol network in Reno, Nev., sounded crystal clear. The
idea that a 30-year-old telecommunications equipment
company also believes it can be a phone company and
compete against the likes of WorldCom (WCOM) and
Quest Communications (QWST) confirmed our sense that
this company has real chutzpah.
Inter-Tel, with a base of 250,000 customers, is already
offering a variety of voice services over its own private
network of T1 lines, including voice mail and long-distance
phone services. Inter-Tel spent about $25 million in the first
quarter of this year to purchase IP telephony systems maker
Telecom Multimedia Systems, and Mihaylo says the strategy
is to integrate that company's voice-grade quality IP
technology with Inter-Tel's PBX offerings. The company will
then use the combined technologies to create
voice-switching products for both corporate networks
looking into using IP voice, and for service carrier networks.
Analysts generally applaud the evolving shape of INTL's
products, saying they could be competitive with gear from
Lucent (LU) and Cisco (CSCO) , but most don't seem to
get the full scope of Inter-Tel's -- and Mihaylo's -- ambition.
While observers believe Inter-Tel's network business is
merely a proof of concept to jump-start sales of its IP phone
switches, the company fully intends to use the gear in its own
network, Inter-Tel.net, in order to compete as an IP-based
telephone carrier.
The service has generated $100,000 in revenue since it was
turned on this month, but Mihaylo says he thinks INTL can
make as much as $300,000 to $500,000 in revenue this
quarter and double that each quarter for the next three to
five years. As the new products resulting from the Telecom
Multimedia acquisition are put into place in the fourth
quarter, Mihaylo expects the network to become more
robust and therefore more competitive.
"The service side is the side we think is going to be the
biggest opportunity for us," says Mihaylo. "We're expecting
$20 million [in revenue] on the product side next year, but
$30 million in revenue on the service side. And services are
a 20% profit business, pretax."
Best of all, the IP telephony business is all pure upside.
Analysts' estimates call for 84 cents in profit per share this
year, and $1.18 next year, a 40% increase, not counting the
service and product revenues from IP. (Eric Buck with
Donaldson, Lufkin & Jenrette is confident the IP products
should bring in at least $16 million in revenue this year
although that depends on how well Inter-Tel integrates the
Telecom Multimedia acquisition.) Analyst Bruce Carlsmith is
happy with those core revenue figures, saying INTL's main
PBX business -- at 5% to 6% share of the market -- is "very
strong."
"I have confidence in their [chief technology officer]," says
Carlsmith, "and I think they'll stand fast on their core
strengths, which are telephony products and services to
small and medium businesses through a very strong
distribution network. If IP happens, that's great." The
company met analysts' numbers on Tuesday, bringing in 18
cents per share profit on revenue of $70 million, up from
$54.8 million in the same quarter a year ago (excluding a 53
cent-per-share merger charge in this quarter.)
But here's the riddle for investors: How do you play a $424
million stock that's been knocked 50% off its high of 32 and
that's going up against giants like Cisco and Lucent in an
uncertain market? Maybe, you figure analysts are right about
their informal 12-month price target of 25, and maybe you
take CEO Mihaylo at his word when he says the company's
customers are just different from Cisco's. ("Cisco products
are great, but their stuff is for people building out networks,
not for people who just want a voice solution.")
And maybe you take into account Inter-Tel's intriguing
technology assets in voice messaging and network
management software and figure that upside or no, INTL's
book value per share multiple of 2.81 makes the company a
nice acquisition target for a large suitor down the road.
-- By Tiernan Ray |
