Tre Analisi per la Tecnologia - Gzibordi
By: GZ on Lunedì 08 Luglio 2002 02:10
I tre pezzi rilevanti di Barron's di sabato sono tutti per titoli telecom, networking e internet ultra-massacrati, di quelli che hanno perso tra il 90% e il 95% dal 2000.
Ad es cita Jonathan Cohen, l'analista che fu licenziato da Merril Lynch perchè era negativo nel 1999 sui titoli internet per fare posto a Henry Blodget che è ora sotto processo. E Cohen ora ha ricominciato a comprare titoli internet (non Yahoo e Amazon però ovviamente, di quelli meno noti).
Barron's è una delle poche pubblicazioni finanziarie, che non riflette quello che è già successo, ma cerca (a volte con successo) di anticipare quello che succederà.
E' diretto da un famoso ribassista, Alan Abelson, spesso suggerisce titoli da vendere e non da compare e non deve sostenere il proprio titolo e quello degli amici in borsa come "MF". Inoltre ha solo 4 o 5 pezzi alla settimana rilevanti ("pochi ma buoni").
In ogni caso è quello che tutti leggono per primo nel weekend e un po fa tendenza.
Non li riassumo e traduco perchè sono analisi lunghe e sono titoli difficili quelli menzionati, a alto rischio dato il trend. Sono analisi economiche e se uno le vuole prendere sul serio deve spenderci un attimo di tempo.
Ma era da parecchio che non si vedevano questi discorsi su :
^Ciena#^, ^Comverse#^, ^Tellabs#^, ^Lucent#^, ^JDSU#^, ^Agere#^, ^Lending Tree#^, ^Register.com#^
Monday, July 8, 2002
Telecom equipment makers have been abandoned by investors. An opportunity on the line?
By ANDREW BARY
These stocks are trading as if people aren't going to use their phones anymore," says Ross Margolies, manager of the Salomon Brothers Capital fund. "This is an industry with high barriers to entry. The worse it gets now, the better it may get because the upturn will come sooner. A lot of the spending is just to maintain services the way they are."
Margolies is well aware of the argument that it's too early to invest in the group because an upturn in equipment spending may not come until late 2003 or 2004 and that most companies now are operating in the red. But he maintains that the stocks are too cheap to ignore.
"The way to play the group is to buy a basket of stocks. You want to try to protect yourself and create a margin of safety," Margolies says. "That means picking clear survivors -- companies that have large, solvent customers, good technology and the ability to finance research and development. And finally, you want to select companies that won't have to dilute you with equity offerings if things go bad."
Margolies is partial to Lucent, Ciena, a producer of optical networking gear, and Comverse Technology, an Israeli outfit that is the leading producer of voicemail software for the wireless industry. He says that all three have the potential to double -- or even triple -- by late 2003. Cash-rich Ciena, which just bought another optical networking company, ONI Systems, could itself become a takeover target for the likes of Cisco Systems.
Table: Battered and Bruised
As the accompanying table shows, Ciena and Comverse trade for little more than the net cash on their balance sheets after subtracting debt. Ciena, whose shares trade around 4, has just over $3 a share in net cash while Comverse, at about 9, has $7 a share in net cash. Tellabs, which trades under $6 a share, has more than $2 a share in cash, a debt-free balance sheet and is the only one of the five companies listed in the table that remains profitable.
Lucent and Nortel are dicier because they have more debt than cash and still are losing money. But both companies have bought time to right their businesses with significant financing actions this year that probably will allow them to go until 2004 without needing additional money. This effectively has turned their stocks into cheap call options on an industry upturn.
Margolies says that Lucent is "clearly a survivor because it has the best customer base, good technology and not a lot of leverage." Lucent, the former telecom equipment arm of AT&T, clearly has been mismanaged in recent years, but it has retained solid relationships with the Baby Bells and its former parent. Ticking off some of its financial attributes, Margolies notes that Lucent trades for a little over half its book value of $3 a share and that its enterprise value/sales ratio stands at just 0.6. Lucent's enterprise value of $7.2 billion is based on a market value of $5.1 billion and net debt and preferred stock of $2.1 billion.
Lucent also has a valuable business servicing its equipment that's expected to generate $3 billion to $3.5 billion of sales in 2002. Lucent has the biggest service business among the major telecom equipment vendors but still has just 10% of a fragmented market and plenty of growth opportunities, according to Lehman Brothers analyst Steven Levy. Lucent's cash, which totaled $4.8 billion at the end of the March quarter, may drop by around $1 billion at year-end 2002, but the cash burn could stop in 2003.
Make no mistake; Lucent isn't a picture of health. The company's projected revenues of $13 billion in its current fiscal year, which ends in September, will be down more than 50% from peak sales of $28 billion in its fiscal 2000. Telecom-equipment producers continue to be plagued by liquidations of used equipment owned by bankrupt carriers that often sell for a fraction of the original list prices. Howard Jonas, the chairman of IDT, an upstart, cash-rich telecom that is rapidly becoming an industry power, says used equipment, which often sells for as little as one-tenth of the list price, can be an attractive alternative to new gear. "It's not like a car engine. There are no moving parts to wear out," Jonas says.
Lucent, meanwhile, is expected to lose about $2.3 billion, or 67 cents a share, in its current fiscal year and it may not break-even until early 2003. The company's sales in the June quarter are estimated at $3 billion, below its estimated break-even quarterly rate of $4 billion. Lucent and other telecom equipment makers have been furiously cutting costs in largely unsuccessful effort to generate break-even results at lower revenue levels.
Alkesh Shah, who covers telecom equipment for Morgan Stanley, recently wrote that Lucent, which has undergone massive layoffs, may announce yet another cost-reduction program soon. The charge associated with the potential "Phase 3" restructuring plan could total $1 billion, Shah said in a client note.
One of the key issues with the equipment producers is their potential earnings power in a business recovery. Some investors will estimate 2004 or 2005 profits and then apply a price-earnings multiple to those earnings to arrive at price targets. Merrill Lynch analysts recently did such an exercise with Lucent and Nortel in which they put Lucent's earnings power at 19 cents and a potential share price of nearly $3 a share.
Margolies is more optimistic, believing Lucent can earn more than 30 cents a share, or a 5.5% net margin, on $20 billion in sales. Put a P/E of 10 on 30 cents and Lucent's stock could trade up to 3, and apply a P/E of 20 and the share could rise to 6.
Tellabs is favored by Rich Pzena, head of Pzena Investment Management, a New York investment firm. "Tellabs has over $2 a share in cash, no debt and it's actually generating earnings and positive cash flow," he says. "There's no bankruptcy risk like you have at some of the other companies." Tellabs' main product, the Titan 5500, enables business users to connect to high-speed Internet lines. There's some technology risk with Tellabs because of the threat posed by optical switches to the Titan product, but Pzena believes Tellabs is safe from that threat.
Tellabs' revenues this year are expected to total around $1.5 billion, less than half of its sales in 2000, but the company eked out a tiny profit in the first quarter and is expected to earn about a dime per share this year. Noting that Tellabs earned over $1.67 a share in 2000, Pzena says the company is capable of producing $1 a share in profits, which would support a stock price of more than $10 a share.
Nortel's plight was apparent in a $1.4 billion financing last month that largely consisted of the sale of 632 million shares of stock sold at just $1.41 a share. That deal shored up Nortel's balance sheet and bought time for the company, but it was enormously dilutive, boosting the company's outstanding shares to nearly 4 billion.
IDT's Jonas, whose company is a user of Nortel switches and optical gear, is a fan of the company. "Nortel equipment has the best reputation in the industry," he says.
With its recent equity financing, Nortel's cash rose to an estimated $4.5 billion from $3 billion at the end of the March quarter. But the company is expected to lose $1.3 billion, or 33 cents a share, this year and burn through more than $1.5 billion in cash before year-end. But Nortel probably has ample cash to go through all of 2003 without needing any new financing.
Jonas says Nortel could become more involved in servicing its equipment, a business that's now handled primarily by independent distributors that sell Nortel gear. Jonas says IDT would be interested in making an equity investment in Nortel in return for the right to handle some of its service business when existing Nortel relationships end. "It's a gold-mine business," Jonas observes.
The bull case for Nortel is that the company is capable of earning 15 to 20 cents a share a year. Put a P/E of 15 on those earnings and Nortel could trade up toward $3 a share.
Ciena's sales and stock price have collapsed, but as noted above, its stock changes hands for little more than the $3 a share in cash on its balance sheet. Revenues in the current fiscal year ending in October are expected to total $400 million, down 75% from the prior year's total. Ciena is expected to post a loss of $244 million, or 74 cents a share this year, compared with profits of $195 million, or 60 cents a share in fiscal 2001. The bear case on Ciena is that it probably doesn't have much more than a dime in annual earnings power until at least 2006
But Margolies says Ciena has strong technology, potential takeover appeal and the financial wherewithal to make it until an industry upturn. He notes that the company continues to spend heavily on research and development in order to maintain its competitiveness. Ciena's net cash per share was little changed following its recent deal to buy ONI for $400 million in stock.
Comverse also has a strong balance sheet with net cash of $7 a share, nearly equal to its current stock price. This means investors are paying little for its voice-mail software and other products, which generate about $800 million in annual revenues.
Margolies' view is that wireless companies have a particular need to maintain capital expenditures because of continued subscriber and usage growth. Comverse is losing money, but its current cash burn is modest given a projected loss of around $65 million, or 36 cents a share this year. Comverse traded at 120 in 2000 and 28 as recently as January. Merrill Lynch analyst Tal Liani said in a recent client note that value investors "may find Comverse's risk profile among the best in the sector."
A less risky alternative to telecom- equipment stocks is their depressed debt. Nortel's junk-rated convertible debt, the 4.25% bonds due in 2008, trades for about 46 cents on the dollar and yields around 20%.
Lucent's $1.8 billion convertible preferred stock issue sold last year also trades under 50 cents on the dollar and yields 17%. It carries junk ratings as well. The Lucent issue is convertible into stock at around $6 a share, a big premium above Lucent's current share price. But the preferred likely will rally if the stock rises.
Ciena's convertible debt, the 3.75% bonds due in 2008, appeals to Margolies because it now trades for under 60 cents on the dollar and yields around 15%. He's betting the bonds are money good because the company has considerably more cash than debt and considerable franchise value. Comverse also has convertible bonds outstanding that yield around 9%.
The convertibles are less dangerous, but the stocks offer the most appreciation potential for intrepid buyers willing to play in one of the most distressed areas of the stock market.
Monday, July 8, 2002
Is Optical Equipment Poised for a Comeback?
By BILL ALPERT
In the crater left by the bursting of the bubble market, the lowest circle is filled with optical network stocks. The road to that crater is paved with dark fiber that we once thought would blaze with Internet traffic. To the devil with JDS Uniphase and Corning!
How strange, then, to encounter Zhiping Zhao, a thoughtful Sanford C. Bernstein analyst who has been recommending optical network stocks since March.
Temporary Relief Traders attributed the Nasdaq's Friday rally to relief to a terror-free Fourth of July. But despite a 5% Friday gain, the Nasdaq Composite Index dipped 1% in the abbreviated week to close at 1449.
"It's a view that not many people are advocating," she says, cheerfully. While most investors figure they'll be drying wet socks on idle fiber lines 'til doomsday, Zhao believes that rising traffic will compel telecom carriers to start buying optical components by year-end. That would benefit JDS Uniphase, the leading maker of optical transmission components, and Agere Systems, the Lucent spinoff whose chips connect optics to computer lines. She thinks JDS Uniphase could rise to 10 from its current price of 2.90. Agere could reach 7.50 from the current 1.84.
Amid the Internet bubble, optical preachers like George Gilder waved hands and mumbled vaguely about rising Internet traffic. Bernstein's Zhao has found something that she can observe and count: "network latency."
Latency is the transmission time required for a message to cross the telecom link, after accounting for distance. If it rises too high, messages are probably sitting in traffic queues awaiting a clear lane to continue their journey. Network operators then face the choice of investing in additional transmission gear or losing customers.
Latency always drops after capital spending. So Zhao figures that significant rises in latency should likewise be a predictor of capital spending. The analyst has spent a year observing two nationwide telecom networks (which she's reluctant to identify). She aims to collect enough data to estimate how much of a latency rise provokes how much capital spending.
Network operators won't say how much latency they think is too much, so Zhao estimates a "normal" latency level for each network link she's monitoring. Then she watches for an increase. To start, she's looking for a 20% increase over the baseline.
One sure thing is that latency is on the rise. On one network, the links showing 20% jumps in latency in the first quarter of this year rose from about 8% to 9%. Cash strapped operators have delayed investment and are running their networks "hotter," explains Zhao, and at some point they'll need to increase capacity. She believes this will happen by year-end. "I could be wrong by a quarter," she says, "But I doubt I'll be wrong by a year."
The WorldCom debacle barely fazes Zhao. WorldCom's many business customers will continue to need telecom services, and she predicts that they'll flood into AT&T. Congestion on AT&T's network, therefore, will rise.
The least costly way of boosting capacity is to slide boards into the expansion slots of existing systems. Another solution is lighting dark fiber by purchasing optical amplifiers. Neither approach would help Corning sell fiber, but component makers like JDS Uniphase and Agere would see orders.
While the 31 analysts surveyed by First Call rate JDS Uniphase, on average, barely above Hold, Zhao rates the San Jose-based firm an Outperform. She believes that revenues could bottom just above $1 billion in the just-finished fiscal year ended June, then rise to $1.2 billion in June 2003 and $2.3 billion in June 2005. After a loss of 12 cents, or $160 million, in fiscal 2002, Zhao thinks JDS Uniphase will nearly break even in fiscal 2003 and make 26 cents, or $350 million, in the fiscal 2005 year.
Agere has suffered, says Zhao, because investors see the firm as an optical component supplier to Lucent. Most of the Allentown, Penn., firm's products are semiconductors, she notes, with 60% of revenues coming from outside telecom. Only 12% of revenues come from Lucent, which completed its Agere spinoff last month. After a recent convertible bond offering, says Zhao, Agere is well fixed for cash. She predicts a loss of $950 million, or 58 cents, on sales of $2.25 billion for the year ending September 2002. Then Agere should break even on $3 billion in sales in the fiscal 2003 year, and eventually make $550 million, or 33 cents, on sales of $4.5 billion in fiscal 2005.
Cabot Microelectronics has been a terrific business. The Aurora, Ill., firm supplies polishing compounds used by chipmakers as they lay down the successive layers of today's multi-layered computer chips. Cabot helped pioneer this polishing process with IBM, and enjoys nearly a 90% market share in certain chipmaking steps where equipment makers like Applied Materials specify Cabot polishing slurry as the "process of choice." Since its spin-off from Cabot Corp. two years ago, Cabot Microelectronics has enjoyed 50% gross margins. For the September 2001 fiscal year, Cabot earned $42 million, or $1.72 a share, on sales of $227 million. After years of better than 60% growth, Cabot Micro has managed to maintain flat sales in a downturn that's crushed other chip suppliers. At a recent price of $42 per share, the company sports a market value of over $1 billion.
Trouble is, everyone wants a piece of Cabot's margins. Because of its quality product, Cabot has been able to charge $15-to-$25 a gallon for its slurries. Rivals like DuPont, Fujimi and Rodel have tried displacing Cabot Micro with prices of $6 a gallon. But while chipmakers have railed at Cabot's high prices, they don't like fiddling with established production processes.
On new processes, however, chipmakers are testing other suppliers, says a terrific researcher I know, who is short Cabot. Chipmakers like AMD and Intel, and Taiwan's TSMC and UMC, have invited Cabot rivals to supply slurry for new chip designs that connect transistors with copper wire, instead of aluminum. Motorola has always used its own homebrewed slurries, which it now plans to market in a venture with DuPont and Air Products.
At a recent Merrill Lynch conference, Cabot Micro executives said they would fend off competitors -- and competitive pricing -- by delivering valuable innovation. But as more chips use copper, my research chum predicts that Cabot's market share will erode, along with its monopoly pricing. He predicts earnings of 77 cents for the September 2003 year -- well below the consensus forecast of $2.40.
That's right: Jonathan Cohen is buying Internet stocks. Now, let's be clear; Cohen isn't expecting a return to the bubble days. Nonetheless, he thinks the market has been overly cruel in its behavior toward a diverse handful of 'Net-related stocks. In our interview, he offered up thoughts on six stocks: five longs and one short.
Back in 1996, as noted, Cohen was deeply bearish on Internet service providers, arguing that the business was going to be commoditized. Last week he said he still thinks Internet connectivity is becoming a commodity, which means trouble for the more established ISPs, such as AOL, MSN and Earthlink. But it is a very good thing, Cohen argues, for United Online.
United Online was created about a year ago from the merger of Juno and NetZero, which were both in the business of offering free Internet access in return for a license to cover your computer screen with advertising. As Cohen notes, the company at the end of March still had 3.6 million customers for the free service, who can connect at no charge for up to 10 hours a month. But the company also finished March with 1.6 million paid subscribers, at $9.95 a month -- less than half what AOL charges.
"The assumption has been that the business they're in, providing Internet access to consumers, is fundamentally unprofitable," he says. "But they're the single company best positioned to benefit from the trend." What's sometimes missed in the analysis of United Online, Cohen maintains, is that the free subscribers are "an enormous asset to the company, even without generating ISP fees." Cohen considers them to be a valuable growth engine in a market in which new customer acquisition is extremely expensive. Getting customers to migrate, he maintains, "is easier than you think."
Cohen notes that the company has been beating Street estimates -- in the March quarter, the company was expected to have negative cash flow of $2 million, but it instead reported cash flow $3 million in the black. Cash flow is defined as earnings before interest, taxes, depreciation and amortization. For fiscal 2003, which ends in June, he expects $25 million in cash flow, "assuming a fairly conservative rate of conversion from free to paid subscribers." Meanwhile, the company has no debt and $125 million, or a bit more than $3 a share, in cash. United's market value, at $435 million, is a little less than twice estimated revenues for the company's June 2003 fiscal year of $225 million. Cohen contends the stock, which last week traded at a little under 11, is worth at least $17.
Another stock Cohen likes is LendingTree, an online loan originator. The company originates first mortgages, home-equity lines of credit, mortgage refinancings and consumer loans on behalf of an array of lenders. Cohen notes that there has been some concern about whether the company would see a fall-off in refinancing volume if rates started to move higher, though he points out that refis are a relatively small part of the company's business.
LendingTree has a market value of about $270 million. Revenues, Cohen says, should hit $95 million this year, and $125 million in 2003. At the bottom line, he expects a loss of 21 cents a share this year, but a profit of 31 cents a share next year, with strong growth after that. In 2001, the company lost $28.9 million, or $1.66 a share, on revenues of $64 million.
LendingTree allows customers seeking loans to get offers from multiple lenders. "The story is analogous to eBay in some ways," Cohen says. "EBay has prospered by creating a proprietary market place with very low costs allowing people to transact over their system, and they generate incremental profits with each transaction. Lending Tree does essentially the same thing." Considering discounted cash flow, potential takeover value and the growing transaction volume, Cohen contends the stock, which closed Friday at 12.62, is worth at least $20 a share.
Cohen also likes Register.com, which is the second-largest domain-name registrar, after VeriSign. While domain-name registration isn't much of a growth business these days, Cohen says, Register has evolved into more of an information-technology-services business, focused on managing domain names for corporate clients. "There is concern about the sector, and some of it is legitimate," he says. "But this is a subscription-based revenue model. It's not like they have to go out every quarter to make their number. Accounts tend to renew over and over again."
The company, Cohen says, has a sterling balance sheet, with no debt and $206 million, or $4.66 a share, in cash; last week Register's shares traded at $7.10. Cohen says the company should earn about 25-30 cents a share this year, with revenue of $100-$125 million. For 2003, he expects growth of about 20%, boosting earnings to 35-40 cents. Last year Register earned $8.4 million, or 19 cents a share, before a $32 million noncash charge, on revenues of $116 million. Cohen thinks the stock can hit 15.
Cohen also offered a pair of micro-cap picks. One is CyberSource, which at $2.02 a share has a market value of $67 million. The company processes online credit-card transactions, handling chores such as account verification, authentication and fraud detection. It has more than 3,000 corporate customers, including Home Depot, Nike and Wal-Mart.
Cohen expects $31 million in revenue for 2002, with roughly 20% growth in 2003. He thinks CyberSource will turn cash-flow positive in the fourth quarter of this year and can produce 30% operating margins over the long term. Like some of Cohen's other picks, this one has ample cash -- about $1.65 a share, or about 75% of the stock's value. He figures the shares could reasonably trade at twice 2003 revenues, which would boost their price to $5 apiece.
An even tinier stock Cohen likes is FairMarket, which provides services to companies that want to sell excess inventory on eBay. FairMarket originally had planned to offer its own auction market for surplus corporate goods, but has since morphed into a provider of software and services that help companies do the same thing on eBay.
FairMarket, which fetched nearly $50 a share, finished Friday at 1.26, giving it a market value of about $37 million. Clearly, investors have given the company up for dead -- FairMarket's cash position, at $60 million, is nearly double that.
Cohen notes that the company recently got a vote of confidence from eBay in the form of a $2 million investment at about $2.10 a share, far above the market price. While FairMarket didn't need the money, the investment shows eBay's support for its services, Cohen says. "Ebay wants it to be successful."
Cohen figures FairMarket can produce $10 million in revenue next year, thanks to business from the likes of Dell Computer, CompUSA and Wal-Mart. The company could get close to break even by the middle of next year, he figures. Give the stock a value of 1.5 times revenues, add in the cash, and the stock looks like a double.
Cohen's a little cagey about his short sales. Like many short sellers, he fears companies will stop talking to him if they know he's betting against them. Nonetheless, he offers one short idea. And it's no micro-cap.
Cohen advises shorting Yahoo! The company, he notes, still has a market value of about $8 billion but annualized revenue of under $1 billion. "That's a big price/revenue multiple to pay for a company that isn't very profitable," he says. "Yahoo's diversification strategy has been unsuccessful. It still gets most of its revenues from online advertising." Cohen notes that the company is expected to earn about 13 cents this year and 24 cents next year. At a recent price of 13.62, Yahoo trades at more than 50 times 2003 earnings. Yahoo lost $93 million, or 16 cents a share, last year on revenues of $717 million.
"The company is a victim of its own success," Cohen says. "It was architected from the beginning without any view on how it would make money, and there's no natural way to migrate the user population to paying customers."
Cohen says Yahoo could eventually be acquired, given its huge traffic and reasonable balance sheet. But not at the current price. Cohen thinks the stock is headed below $7 a share.
Edited by - gzibordi on 7/8/2002 0:51:20