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Teaching an Old Dog New Tricks
02/09/2009 11:36 am EST
Nikhil Hutheesing, editor of Forbes Wireless Stock Watch, says one telecom equipment supplier is junking its legacy systems in a move toward higher growth.
Over the past year, Wall Street has just about written off Tellabs (Nasdaq: TLAB). Sales of the company’s high-margin products had been falling. These included networking equipment which was based on the SONET networking protocols. Carriers have been moving away from the SONET-based technologies Tellabs offered, towards Ethernet-based networks.
Tellabs, it seemed, was about to become a dinosaur. Its stock fell from nearly $7 per share at the beginning of the year to $3.39 in October.
But now, it looks like things are turning around. Tellabs has been focused on getting out of its legacy products and repositioning itself for growth with a new portfolio of products targeted at high-growth markets such as mobile backhaul, optical networking, Ethernet, and business services. Tellabs’ growth products now represent 40% of sales, and sales are expected to grow some 20% this year.
Besides the new products, Tellabs is also focused on building up its business services division and expects to see a 10% compound annual growth rate through 2011. Services should also help provide a steadier revenue stream against lumpier product sales.
While Tellabs is definitely moving in the right direction, the tough economy right now isn’t helping. The telecom carriers have cut spending significantly—by up to 10% and that will put a damper on Tellabs’ revenues in the first half of 2009.
But the company is working hard to sell its new products. So far, it has had some success. Tellabs recently announced that it added BT as a new customer for its new products, brining its total customer count for the product to 95, up from 80 last quarter.
Shares of Tellabs look especially attractive. The stock now trades above $4.00 per share. On January 27th, the company reported that its fourth-quarter profit more than doubled to $12.8 million compared with $6.3 million for the same quarter in 2007.
For 2008, the company posted a loss of $930.1 million, compared with a profit of $65 million, or 15 cents per share, in 2007. Revenue fell to $1.73 billion from $1.91 billion the year before.
However, with TLAB’s new higher-margin products, I think we should expect to see better results in 2009. TLAB has a strong balance sheet with $376 million in cash and no debt—rather unusual among telecom companies. Its price/sales ratio of 0.98x compares [favorably] to 2.43x for a competitor like Cisco Systems (Nasdaq: CSCO).
The enterprise value of TLAB currently trades at 0.4x sales. I think the shares, in a recovering market, could trade at one time enterprise value/sales, giving the shares a one-year target price of $6.50.
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