continues to shine, its merger partner
is deflating this networking merger's momentum appeal.
In the past two years Cascade and Ascend have been two of the fastest-growing big networkers, and many tech investors have watched -- and hoped -- for the two companies to rebound from their terrible 1997 start. Now the two flagging hotshots are fighting back together: On March 30 Ascend announced it would buy Cascade for $3.7 billion in stock.
After the bell Thursday, Ascend reported first-quarter profit of $46.3 million, or 36 cents per share, up 139% from $19.4 million, or 15 cents per share, one year earlier. That number disregards an $18 million charge related to the purchase of
. Net sales rose 120% to $202.4 million from $92 million. Its performance topped the
expectation of 33 cents and met the so-called whisper number. Ascend was largely unchanged in after-hours trading, according to
Cascade reported net income of $14.8 million, or 15 cents per share, in line with its downcast earnings forecast made March 30. That performance, which excludes a $213.1 million charge related to the purchase of
, is an increase from $10.4 million, or 11 cents per share, one year earlier. However, it marks a sequential quarterly decline. Cascade also moved little in after-hours trading.
The companies' recent woes stem from a slowing rate of growth -- even though they continue to report scorching gains. In the past three years, Ascend has averaged earnings growth of 160% annually, compared with its 139% gain in the past year. Cascade has reported average earnings growth of 116% annually in the past three years, but its earnings only grew 34% in the past year.
Despite the sharp first-quarter selloff -- which stemmed from the slowing growth rates -- the two stocks still reflect high investor expectations. Ascend trades at 52 times trailing earnings and 10 times sales, while Cascade's price-to-earnings ratio remains 42 and its price-to-sales is 8. Those rich valuations top nearly all their peers, with the exception of
Many investors wonder if the combined companies can maintain the high rates of growth to justify their valuations.
The two companies are positioned in the hottest niche of the networking sector -- supplying carriers with the gear needed to fill the voracious public appetite for Internet connections. Ascend provides the access equipment and Cascade serves up the switches.
"Think about how hard it is to get online these days," says Kevin Landis, manager of
Interactive Investments: Technology Value
. Companies like
are working frantically to deploy the necessary infrastructure, and Ascend in particular can supply the necessary "dialup" Internet access, Landis points out.
Landis says he bought shares of Ascend and Cascade as they tumbled last quarter. He remains undeterred, provided that their future earnings do not disappoint. "If this combined company goes on to grow 30% to 50% for the foreseeable future, that's just fine with me."
On Thursday, Ascend lost 1 to 46 3/8 and Cascade fell 7/8 to 30 3/8. Since the merger was announced, Ascend shares have lost 8%. Cascade has gained 11%.