"Rational" Telecom Plays

08/29/2003 12:00 am EST

Focus:

Jamie Dlugosch

Editor, The Rational Investor

Although risks remain high, The Rational Investor continues to see opportunity in the telecommunications sector. Editor Jamie Dlugosch notes that the entire industry continues to suffer from excess capacity. Nevertheless, he has buy ratings for both ADC Telecom and Corning. Here’s his review.

"ADC Telecommunications (ADCT NASDAQ) continues its work toward profitability. Shares of ADCT have barely moved and still trade close to its low at $2.35. The troubles of the broadband industry are well known as too much capacity nearly crippled much of the industry. Mountains of debt, used to build such networks, made matters worse. Such troubles represent a bump in the road as broadband remains an attractive vehicle for high speed transmission and data capacity. While the telecom market has delayed purchases as they struggle with balance sheet problems, ADCT has reduced costs and attempted to redefine its business. It would appear that its efforts are starting to show promise. Staying lean with little debt has given ADCT the breathing room it needs to get back to profitability. While the market continues to be difficult, ADCT is positioned to benefit greatly as demand increases. Its high-speed Internet product is well regarded and offers great potential. We believe the stock offers investors an intriguing opportunity.

"It hardly seems possible that shares of Corning (GLW NYSE) were priced for nearly $1.00 per share within the last year. It has been a nice recovery for GLW, especially given the bankruptcy concerns of the prior year. The massive build out of fiber optic networks and the subsequent debt incurred by the company forced GLW to restructure and sell assets. In response to these changes, the company has exceeded guidance and is on track to reach its goals for 2003. From a valuation standpoint, GLW is fairly pricey and would not be a buy for traditional value investors. With 2004 earnings expected at $0.17 per share, the stock is trading at 45 times earnings. The trick is that earnings can grow substantially and many growth and momentum investors are now accumulating shares. With survival no longer a question, GLW may double once again. I still see value up to $8; my target is $16."

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