Bottom Fishing For Networking StocksGary Mcwilliams
First came the euphoria. Then the tumble. Companies that provide the gear used in constructing the nation's high-speed information networks are bloodied and bruised. Many are trading at less than half their 52-week highs. Overall, the GTSI Multimedia Networking Index, a basket of two dozen stocks that had surged to a high of 122 in late January, has since fallen to 98. Why the plunge? For one thing, a number of networking companies have reported so-so earnings. Moreover, investors are worried that the two industry giants--Cisco Systems and 3Com--will squeeze smaller rivals. Indeed, 3Com on Feb. 26 announced plans to gobble up U.S. Robotics.
Has the sell-off gone too far? Many networking pros sure think so, at least in the hot remote-access niche of the business. These are the outfits that supply the equipment for connecting to online services and private networks at a distance. "This industry is still growing from 30% to 50%, but remote access is up in the triple digits," says Beda Fong, an analyst at Dell'Oro Group, a market researcher in Portola Valley, Calif.
REVENUE KICK. Remote-access supplier Ascend Communications in Alameda, Calif., is on many Wall Street buy lists. Last year, the company grabbed 35% of the market for "concentrators," the gear that helps companies funnel traffic onto the Internet and private networks. But Ascend's stock dropped from 80 on Jan. 3 to 50 3/4 six weeks later, after rival 3Com issued a cautious outlook for the networking business, then turned around and swallowed up U.S. Robotics. Although it has since bounced up to 55 3/8, analysts believe Ascend may live up to its name and climb even further. Earnings are expected to reach $182 million this year, up from $113 million in 1996. Ascend's price-earnings ratio of 62 is well below its average 105 p-e since May, 1994.
Ascend may have more going for it than a relatively depressed stock price, says Todd Dagres, a general partner at Battery Ventures, a venture capital-firm in Wellesley, Mass. The company gets half its sales from overseas markets and is about to receive a revenue kick from a new line of remote-access switching products. Moreover, Ascend boasts of strong ties to phone companies that are taking over the operations of many private networks.
Such a shift should also benefit Cabletron Systems in Rochester, N.H., and Cascade Communications in Westford, Mass. Both recently acquired companies that make remote-access gear aimed at Internet-service providers (ISPs) and phone companies. J.P. Morgan analyst William D. Rabin sees such products lifting Cabletron's earnings to $350 million, a 32% rise over last year. At 26.6, Cabletron's p-e ratio is well off the average 37 p-e of the GTSI networking index. Cascade, whose shares tumbled in January after it reported lower-than-expected earnings, is one of only two companies--Ascend is the other--that supply concentrators able to handle 500 modems at a time. Such equipment is on the wish lists of phone companies that want to boost their network capacities.
Meanwhile, as a type of ultra-high-speed modem known as ADSL (asymmetric digital subscriber line) begins to emerge, other beaten-up companies are worth a look. At $10 a share, Wes-tell Technologies in Oswego, Ill., is trading at a fraction of the $56 it drew last June. Shares of Westell, which has sold more ADSL modems than its competitors, could take off again if the company is able to snare one of the contracts expected to be put up for grabs by GTE, Bell Atlantic, and US West, says TeleChoice analyst Kieran Taylor.
Of course, not every networking company with remote-access products will bounce back. Analysts reckon that Gandalf Technologies in Nepean, Ontario, Microcom in Norwood, Mass., and Premisys Communications in Fremont, Calif., will remain in the doghouse.
VULNERABLE. These companies are either too dependent on a few big clients or aren't nimble enough to exploit the changes in the marketplace. Gandalf, for example, focuses on corporate networks, leaving it vulnerable as ISPs and telephone companies gain ground. And after hitting a peak of 65 last May, Premisys is down to 13 7/8 and may soon lose Paradyne, the AT&T subsidiary that is its biggest customer.
One corporate network supplier that bargain hunters do relish is Shiva. Its stock has been hammered lately, plunging 56%, to 15 1/4. But the Bedford (Mass.) company, named for the Hindu god of destruction, has a growing role supplying access products to Northern Telecom, one of three main gear providers to phone companies. With a p-e that's only 70% of the GTSI index average, it's "an ideal company for individuals looking for a low p-e entry into the remote-access space," says Dillon Read technology analyst Robert M. MacLellan. Now, if only Shiva's namesake would stop wreaking havoc on the entire industry.