As communications companies battle for customers by upgrading their cable networks to adapt to new media, the Hickory, (N.C.) based CommScope, Inc. (CTV) has been selling more of its cable. After the company said it will announce stronger than expected results from the first three months of this year, investors piled into the shares on Mar. 14.
CommScope management now expects first quarter revenue to be in the $415-$425 million range and operating profit margin to be in the 12.5% to 13.5% range, excluding any special items. Previous guidance had been for $390-$410 million revenue and operating margin of 10.5% to 11.5%. "We believe that CommScope is well positioned as powerful drivers continue to change the face of global telecommunications," said CEO Frank Drendel in a press release Mar. 13.
The news surprised investors, who bid up the stock 8.4% to $41.01 per share on the New York Stock Exchange the next day.
More companies are finding ways to provide video, Internet, and phone services bundled together. Even telecoms like AT&T (T) are scrambling to get a piece of the action with plans to offer TV services in the coming years (see BusinessWeek.com, 7/31/06, "The Phone Companies Still Don't Get It"). But much of this requires upgrades to existing cable networks.
"We think the higher guidance reflects accelerating network upgrades in the enterprise, cable and carrier markets, stemming from the proliferation of bandwidth-intensive multimedia applications," said Standard & Poor's equity analyst Ari Bensinger in a Mar. 14 research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Cos.) He added that the company's profits have also been benefiting from the falling price of copper, which CommScope must buy to make its products.
After suffering years of declining profits following the dot.com bubble burst in 1999, CommScope has resumed its growth in recent years. In January, 2004, CommScope acquired Avaya's Connectivity Solutions business. In May, 2005, CommScope opened a plant in Suzhou, China, to manufacture broadband cables.
Morningstar analyst Jacqueline Zhang said in a research note Feb. 12 that factors such as the completion of the Adelphia purchase by Comcast (CMCSA) and Time Warner (TWX) should benefit CommScope as the two leading cable companies begin upgrading Adelphia's previously neglected networks. "We believe ongoing capacity needs from telecoms and corporations will provide decent top-line growth for CommScope. However, we expect long-term operating environment to remain challenging," Zhang said.
Zhang pointed out that CommScope operates in a cyclical industry. "Companies invest significant amounts of capital in information technology during economic upturns, but IT spending is often the first to be slashed during tougher times as firms try to conserve cash," she warned.