Tellabs' undervalued stock calls for buying, analyst says Street Smart Kathleen Gallagher
Tellabs Inc., Lisle, Ill., designs, makes, markets and services voice, data and video transport and network access systems for public telephone companies, long-distance carriers, alternate and cellular service providers, cable operators, government agencies, utilities and business end-users. AnalystTheodore J. Moreau, managing director and telecommunications industry analyst at Milwaukee's Robert W. Baird & Co. Inc. Tellabs shares have not recently seen the kind of upside many of the company's peers are experiencing. The reason: concerns its major product is becoming outdated. But Moreau thinks the crisis is years away and trusts Tellabs will come up with enough new products and upgrades to keep itself competitive. Meanwhile, Tellabs' stock is less expensive than that of most other companies in the industry. "We think Tellabs is cheap," Moreau said. Investors are willing to pay significant premiums for such telecommunications industry stocks as Lucent Technologies Inc. and Nortel Networks Corp., which have price-to-earnings ratios of as much as 60 times next year's earnings.
Sure, they're bigger and have broader product lines, but Lucent trades at two times its earnings growth rate, Nortel three times. Tellabs is selling at just 1.3 times its earnings growth rate, Moreau said. Part of the reason Tellabs' bigger peers have such high multiples is because there are so many factors working in the telecommunications industry's favor. Phone company suppliers are profiting from international markets' recovery from their tumble late last year and the privatization and deregulation of phone companies around the world - and from the fact that less than 10% of the people living outside the U.S. own phones. They've also seen increased demand for equipment as a result of moves to wireless networks, the growth of the Internet and the growth of new phone companies in the United States. "The need for bandwidth is almost insatiable," Moreau said. Still, Tellabs' PE is lower than those of its peers because of Wall Street's concern that it won't be able to compete in the next generation of networking.
Almost 60% of its revenue comes from one core product Tellabs developed about 10 years ago. The product provides high bandwidth and significant cost advantages to telephone companies by transferring signals back and forth between optical and electrical networks.
"That's driven their growth over the past decade," Moreau said. It also helped Tellabs go from a company with $100 million in revenue 10 years ago to one that will have almost $3 billion in revenue next year.
But investors have held back its share price because they worry that as more companies put fiber optic cables in place, they won't need Tellabs' product to convert from the old to the new equipment.
"But we think that's years away, and they're working on it," said Moreau, who thinks Tellabs can continue to turn in an annual earnings growth rate of 30%.
Tellabs' customers include almost all the big carriers - Bell Atlantic, MCI Worldcom and Sprint. Moreau thinks AT&T's long-distance division will soon be a customer as well. "That alone can drive the company until new products are put in place," Moreau said.
Tellabs has initiatives for products that will transmit data from cable systems to fiber networks and offer voice and data capabilities over cable networks. The company is also working on echo cancellation, which improves the signal quality of a wireless network, and a product that is used in overseas markets for managing networks under international standards.
Moreau thinks Tellabs shares are best suited to aggressive investors looking for high-growth companies.
He has his highest buy rating on Tellabs and would purchase these shares up to $72. Moreau thinks this stock could go as high as $85 in the next 12 months. (STYL)BODY Symbol/Exchange: TLAB, Nasdaq Dec. 17 price: $63.25 52-week range: $77.25 to $31.563 Dividend yield: none Long-term debt: $332 million Shares outstanding: 415 million Avg. daily volume (12 month): 4.7 million million shares *Earnings per share (1999): $1.30 *Earnings per share (2000): $1.67 P/E ratio (1999): 48.7 P/E ratio (2000): 37.9 *Analyst estimates for year ending Dec. 31.
Kathleen Gallagher's Sunday Street Smart column examines one stock through the eyes of a professional investor, revealing how market pros make investment decisions. Neither Gallagher nor The Journal Sentinel recommends specific investments or endorses the recommendations of those interviewed for this column.
Appeared in the Milwaukee Journal Sentinel on Dec. 19, 1999.
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