Analyst's Latest Comment. Enjoy.
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10:55am EDT 6-Oct-98 CIBC Oppenheimer (Bregman, Lior 212-667-7045) SAWS DSP
WIRELESS COMMUN-Decline In Valuations Intensifies; 3Q Preview & Ind. Update P1
CIBC Oppenheimer Part 1 of 9
October 5, 1998
Wireless Communications
Lior Bregman (212) 667-7045 Decline In Valuations
Dale R. Pfau (415) 434-5871 Intensifies; 3Q Preview and
Marc Crossman (212) 667-7042 Industry Update
Mirva Anttila (212) 667-7865
The bear market in the wireless communication food chain started late in 1997
but demonstrated a dramatic viciousness in recent weeks. The so called "Asia
Flu" turned into a major global crisis taking its toll in "unfair" proportion
in terms of timing and magnitude on different relevant segments. The most
recent victims are the till now immune large capitalization telecom equipment
vendors. The hopes that by now a recovery will be well underway were replaced
by well-founded fears of a global depression. The result is a dramatic
decline in overall valuation levels coupled with high level of volatility
driven by a rapidly changing mix of psychological and fundamental
considerations.
Our humble prognosis still calls for a fourth quarter recovery and the
dramatic crash in valuations that occurred late in the Third quarter supports
this potential, at least from a low starting valuation level perspective. As
discussed in previous reports, we have also seen a significant increase in
share repurchase and M&A activity within the universe. These are two
important catalysts in establishing the bottom and creating a stronger base
for a potential recovery. The title of our previous industry update was
Searching For a Bottom, we clearly have not found one yet. At the same time,
experience taught us that it always looks the darkest at the bottom. It
certainly feels this way, especially with regard to the smaller capitalization
stocks which are taking another hit now that the larger capitalization
stocks have finally begun to cave-in. The reason we are not declaring a
bottom yet is two fold. First, we really expect to know that a bottom was
found only after the fact. Second, the magnitude of the crisis and the
resulting dislocations in various international markets are only now becoming
apparent. As demonstrated in recent months, being too early could be fatal.
Recent strong stocks in the group include takeover targets (Teledata
Communications, Comsat), earning momentum situation (Gilat Satellite, RF Micro
Devices) and a share repurchase program (Sawtek). Gravity, reversed
psychology and, in some cases, further negative fundamental developments have
significantly depressed stocks that led the appreciation list as recently as
our last report (August 21) to the bottom tier (DSP Communications, Anadigics,
Lucent, Vitesse Semiconductor). These dramatic fluctuations further
demonstrate the fundamental uncertainty and great deal of investor confusion
that are driving the near term volatile performance of this group.
Courageous investors, ready to average down if necessary, could consider the
underlying value created by the current uncertainty surrounding DSP
Communications and LCC International. We are adding the latter to the focus
list in the hope that given the dramatically reduced expectations, possible
tower/outsourcing wins could help the stock recover from its depressed level.
The price of DSP Communications is extremely depressed due to continued
Japan-related concerns and uncertainties surrounding sales to Philips. Within
our current focus list, we continue to believe in the attractiveness of
Gilat Satellite Networks (top performer) and Stanford Telecommunications
(weak performer). The former has just undertaken a major strategic move
into the service side of the business that could reduce the long term risk and
increase the upside potential. The latter continues to suffer from anemic
near term financial results drvien by heavy R&D investment in the LMDS area
which is taking off. Also on our focus list are four components companies that
could benefit from a year-end rally given their continued strong fundamental
performance: RF Micro Devices (pre-announced momentum), Vittesse (weak due to
negative announcement from telecom customers, possible recovery driven by strong
outlook), Alpha Industries (possible benefits from sales to Motorola's new
phones) and Aeroflex (solid results).
As indicated in previous report, the previously hot satellite communication
area is among the last segment to cool-off with the recent Globalstar setback
providing another piece of bad news. The industry consolidation, however,
continues in full force with the pending acquisitions of GE Americom's VSAT
business (by Gilat) and Comsat (by Lockheed-Martin). Clearly, manufactures
of satellite-related hardware and launch vehicles frustrated with competition
and margin in these businesses are interested in moving into the more
lucrative service segment. We believe that in view of the low valuation and
the coming series of less risky launches, the shares of Loral, present
investors interested in the segment with an attractive diversified investment
vehicle.
Last to correct, providing additional pressures on the already small cap
universe, are the large capitalization shares. Ericsson, Nortel and Alcatel
provided a series of negative news that have put valuation pressures on the
shares of Qualcom, Lucent, Motorola and Nokia. we believe that this possible
last stage of the group's correction is an important in the process of forming
a bottom, possibly creating interesting entry point. Our bias, however, is
clearly toward the aforementioned smaller companies where the values and
limited downside are easier to defend at this point in terms of timing and
relative valuations.
Infrastructure contract awards finished the third quarter at $5.9 billion,
down 16.5% sequentially from the record second quarter level of $7.1 billion
but up 14% over Q3/97 contracts of $5.2 billion. Infrastructure contract
awards for the first nine months of 1998 totaled $18.1 billion, an increase of
58% over the $11.7 billion awarded for the first nine months of 1997. GSM
technology continues to lead, capturing 56% of total awards. CDMA, however,
continues to grow very fast. The global subscriber base is up 49% with
digital accounting for 75% of new subscribers. We estimate growth to reach
310-330 million subscribers by year-end 1998 and about 600 by 2001.
Vitesse Semiconductor: Despite negative announcements from some of Vitesse's
telecom customers, we expect sequential quarterly revenues and earnings
growth in line with our estimates and a book to bill between 1.18 and 1.22
this quarter. We believe that the overall business at Vitesse remains
exceptionally strong. Our price target is $45-50.
Third Quarter Financial Trends by Industry Segment:
Components/Sub-Assemblies (Analysts: Dale Pfau, Lior Bregman)
GaAs Semiconductors: Overall demand due to cellular/PCS handsets continues to
be strong in this segment. We continue to see company specific issues which
are affecting valuation. We believe that Vitesse Semiconductor remains the
strongest and most consistent of all the GaAs manufacturers and we remind
investors that the company is the only digital GaAs supplier in the group.
The stock price has been under pressure recently due to negative comments
from Ciena, Tellabs, Alcatel and Northern Telecom regarding third quarter
expectations. We believe that the company is on track to meet our
expectations and bookings continue to be at their historic levels. RF Micro
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