Redback Networks (RBAK) looks poised for a big recovery, according to Morgan Stanley Dean Witter analyst Christopher Stix, and the stock was jumping on the news.
Stix, who gave
the thumbs up three weeks ago, told investors that Redback has potential upside of 75% against a potential downside of 15% because bad news is already priced into its stock, which was down 65% year-to-date as of yesterday's close. Redback surged 12% to $16.10 and was among the most actively traded stocks on the
Stix said that the news would only improve for Redback because companies that lay out digital subscriber lines, or DSL, will continue to need Redback's Sonet equipment, a subscriber management system (SMS) that allows them to handle traffic in a local network. In the last two quarters, SMS sales have faltered due to inventory corrections, but Stix said this trend was over and the SMS product line will soon stabilize and begin showing sequential growth. As a result, the battered stock will improve.
"We believe that investors will revalue the SMS business, giving potential upside to the stock," he wrote, adding that the company's visibility has improved somewhat, giving Redback a decent shot at hitting 75% upside. Based on yesterday's close, that would be a share price of $25, which is where Stix placed his price target on Redback.
Nothing is a given, however. Redback still needs to complete 70% of its business during June to make the next quarter, a challenge given the economic climate. And competition will be fierce, with
already battling it out for market share as well. But Stix said in the event of an earnings miss, downside risk for Redback would only be 15%, making the risk/reward scenario a rosy one.
The crux of his argument is that bad news is already priced into Redback's stock. A quick check of the newswire reveals a company that certainly has dealt with its share of issues in the past year. Redback's stock is at a mere fraction of its 52-week-high of $181. The company saw its CEO resign, business grind to a halt and missed expectations in the first quarter of calendar 2001. Making matters worse, orders have primarily back-loaded, meaning that Redback was working that much harder to meet lowered expectations. And as a result, the company's stock dropped below $10 during April.
In the wake of all this negativity, Stix said that the company is poised for a rebound. "Again, any strength in the SMS business will likely boost gross margins, which we view as a positive," he wrote. Aside from the uptick in SMS orders, Stix also said the company's new management was solid, that it had a solid customer base with carriers like
accounting for a healthy chunk of revenue, and that next week's SuperComm convention could prove to be a near-term catalyst for the stock.