Headline: Tellabs, Inc: This is No Maiden Voyage
Author: Steven D. Levy 1(212)526-2499/Sender Cohen (212)526-3777/Andrea Green
Rating: 1
Company: TLAB
Country: SEO EPS CUS
Industry: TELECM
Ticker : TLAB Rank(Old): 1-Buy Rank(New): 1-Buy
Price : $83 3/4 52wk Range: $93-31 Price Target (Old): $ 75
Today's Date : 01/26/99 Price Target (New):$110
Fiscal Year:DEC
* Fourth quarter revenues of $521 million and EPS of $0.62 exceeded all expectations.
* Record year-end backlog and strong industry trends lead to excellent visibility for 1999.
* Important new products are on schedule, raising visibility into 2000.
* We are raising 1999 EPS estimates slightly to $2.46 and establishing a 2000 EPS estimate of $3.15. We continue to believe that there is material upside to these numbers.
* We are establishing a new price target for year-end 1999 of $110, up from our previous price target of $75 for mid-1999.
* Tellabs remains our number one investment recommendation.
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Summary and Recommendation: A combination of strong industry trends and excellent product positioning is filling Tellabs' sails with Titanic amounts of wind that should keep the ship moving at an above-industry-average clip through 2000. Tellabs once again exceeded revenue and earnings expectations in the December quarter. The company's fourth quarter results demonstrated, yet again, that Tellabs is able to cut through the rough seas of competition and general market uncertainty and emerge in fine shape to finish the next leg of its global adventure. This fact alone should buoy Tellabs' shares in the near term while over many more sunsets, 340 to be specific, we believe that TLAB could reach a new high-water mark of $110. Thus, we are comfortable reiterating our recommendation (Strong Buy 1 rating) that investors ride this ship into the new millennium.
Fourth Quarter Results: They were excellent. Period. As it does no one much good to regurgitate the information released by the company in its press release and earnings conference call we thought that taking a different tack would be appropriate. After all, how many more quarters of outperformance do we need before being convinced of how well positioned Tellabs is to handle the increasingly dynamic demands of today's telecommunications networks? The company exceeded expectations in just about every revenue category and was still able to build a record backlog going into 1999. Furthermore, its record 4Q gross margins of more than 66% allowed Tellabs to drive quarterly net income margins to just a hair below the 25% level. Enough said.
An Outlook Into 1999 and 2000 That -- Surprise, Surprise -- Continues to Get Better: The Tellabs story just keeps on getting better. For example, at approximately the same time as it failed to consummate its doomed marriage with CIENA Corporation, Tellabs was successful in merging with Coherent Communications. The Coherent merger has turned out to be nicely additive to Tellabs' top and bottom line and positions the company as a much broader supplier of voice quality enhancement solutions for communications carriers of all types and locations. In addition, just when the common wisdom misidentified Tellabs' TITAN digital cross connect systems business as being a victim of the move to packet-switched network architectures from circuit-switched ones, the true strength of that product line emerged and sales were re-ignited.
Staring into that horizon we call our forecast, we see slowing growth in Tellabs' two main product lines, the TITAN 5500 and the Martis DXX digital multiplexer. These expectations are not new, however, and are primarily a function of the two product lines' life cycles and their absolute size -- $852 million and $405 million respectively in 1998. Compared with our previous revenue and earnings model we have actually increased our revenue forecast and, in the case of Martis, our growth rate assumption. For proof of the important role Tellabs' TITAN product is playing in the evolution of its customers' networks to new, high-speed, data-oriented architectures please see the transcript of our December 4, 1998 Telecom Tutorial conference call with Marty Kaplan, Sprint's chief technology officer.
While these two important revenue streams have changed only slightly in our forecast, it is certainly worth noting that our view of Tellabs' "third leg," network enhancement technology solutions or NETS, has increased markedly. We are now estimating that NETS sales should climb to more than $250 million in 1999, or 63% -- a noticeable increase from our prior figure of less than $200 million.
And finally, the new products that we have been anticipating for the past few months (see our report entitled "Why You Should Still Buy Tellabs Shares!", October 29, 1998) are beginning to reveal themselves. The recently announced AN2100 ATM voice multiplexer generated about $10 million in 1998 and we are forecasting that it could do an additional $68 million in 1999 and $130 million in 2000. During its quarterly earnings conference call Tellabs also confirmed that in the next month it expects to be able to formally announce the international gateway version of its TITAN 5500 and that first revenues should occur this year; we have zero revenues in our model for this product in 1999. Tellabs' management also reiterated its comfort with prior statements about the timing for delivering the successor product to TITAN 5500, generally referred to as the BTM or broadband transmission manager, and its wavelength division multiplexing system aimed at metropolitan applications.
The bottom line is that all the pieces are coming together at least as well as we have been forecasting and even though we are only nudging up our forecast for 1999 earnings per share by $0.01 to $2.46, we see many different ways that Tellabs can blow right through that number. Our initial cut at 2000 earnings yields a $3.15 figure, a 28% increase over our current 1999 estimate. If history is any guide, however, we could be moving that forecast up in the not too distant future as well.
What You Should Pay for a Ride on the Good Ship Tellabs: Considering the facts that (1) Tellabs has been disappointment-free for more than eight straight years, (2) its profit margins are the highest in the telecommunications equipment industry, (3) it is about to embark on the largest rollout of new products in its history, and (4) its forecasted earnings growth rate for the foreseeable future is likely to be approximately 30% or better, we are using a sustainable P/E multiple of forward 12 months EPS of 35. This exercise yields an end-of-year price target of $110, an incremental 30% from today's closing price of below $85. Of course, if the Tellabs' cruise gets overbooked, we could see that price target exceeded or reached earlier. Either way, the investment in TLAB shares appears to us to be as attractive as it has ever been and we encourage those passengers that have not bought their tickets to do so and for those who have to invite their friends on board.
BUSINESS DESCRIPTION: Tellabs offers a wide range of voice and data
communications products used by telephone companies, cellular carriers, interexchange carriers, governments, and businesses worldwide. |
