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Telecom-equipment maker

Tellabs

(TLAB)

is in the doghouse right now, trading near $17, well off its 52-week high of $67.13.

But although Tellabs lost more than $100 million from operations and more than $20 billion in

market cap over the past year, it still has a solid shot of making a comeback in 2002. The Illinois-based company designs, makes, markets and services optical next-generation switching and broadband access solutions.

What makes me so confident?

Where the Upside Is

For starters, CEO Richard Notebaert commented in a November press release that Tellabs' business had begun to level off and "prices are getting into the range of reasonableness."

So does that mean some dramatic turnaround is imminent? Not at all. But remember, you want to buy this kind of stock when the tide looks like it has begun to turn.

Also, factor in that Tellabs isn't leveraged to the hilt. Its debt load represents less than 1% of its total shareholders' equity.

What's the significance of that?

Couple it with the fact that the company has more than $1 billion, or roughly $2.57 a share, in cash and marketable securities, and it should serve as a signal that Tellabs has the financial flexibility to weather the industrywide slowdown.

This Fallen Star Could Rise
It's off its highs, but Tellabs may come back

Tellabs' management has responded to the marked slowdown in phone-carrier spending by laying off some 2,500 employees. The timing of these layoffs is crucial. By making the cuts before year-end and preannouncing a fourth-quarter charge of $150 million, Tellabs' 2002 earnings should appear as pure as the driven snow (meaning charge-free).

The Bottom Line

In addition, its purchase of Ocular Networks, which is expected to close in the first quarter, will give Tellabs access to a slew of new optical products. In 2002, the deal will be mildly dilutive to the tune of about 3 cents to 4 cents a share, according to management.

Beyond that, the acquisition could add a nice chunk of change to Tellabs' bottom line, although how much isn't quantifiable right now. However, the stock could react positively as the sell-side analyst community begins to reflect the potential synergies (from eliminating redundant overhead) in their future earnings projections and models.

Despite the troubling near-term outlook for equipment makers, the consensus among the sell-side and buy-side folks I've talked to suggests the company could (assuming phone-carrier spending bounces back in the second half of 2002 as expected) still grow its bottom line by 15% or more over the next five years, which isn't too shabby.

Tellabs has taken its lumps. I'd consider buying this stock, betting that in two or three quarters the share price will begin to trend up on both an improved outlook for the industry and on the company's future earnings potential.

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In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Curtis welcomes your feedback and invites you to send it to

Glenn Curtis.