A brutally honest comment from
chairman about the state of the telecom equipment industry was, in part, responsible for taking the stock down sharply this week, according to a number of analysts who follow the company. Of course, the departure of its top executive didn't help matters.
Tellabs began to tumble Monday after the company announced that CEO Richard Notebaert left the company to join
For some investors, the news was seen as a blow because Notebaert had gained a reputation as a tough manager, responsible for slashing costs and keeping Tellabs almost debt-free and cash flow positive at a time when other telecom equipment companies are struggling to survive.
But analysts said it was a comment from chairman Michael Birck that contributed heavily to the sharp downturn in the stock.
In an interview with
Monday, Birck said Tellabs continues to weather the "nuclear winter in the telecom business." However, he also said he doesn't see any imminent relief for his company's customers.
"There's not an analyst out there who would disagree with him," said one analyst who asked not to be identified. "But for the CEO of one of these companies to say that and not back away from it, you could see why that would
impact the stock, particularly if you're Tellabs and you're one of the few guys in the equipment space that's still trading around $10."
Tellabs lost 17% in the first two sessions this week. Lately, the stock was down 9 cents, or 1.3%, to $7.01. Earlier in the day, the stock hit a 52-week low at $6.90.
Not a Novice
Birck, who founded the company, took it public and was chief executive until Notebaert replaced him in September 2000, will assume the title of president and CEO.
Rick Schafer, an analyst at CIBC World Markets, said Birck has a lot of respect from Wall Street and has remained closely involved with all major decisions over the last two years, making the transition relatively easy.
"Fundamentally speaking, I see it as a nonevent," he said.
Indeed, some analysts suggested that investors had overreacted in sending Tellabs stock down so much, particularly given the company's strong balance sheet. The company has roughly $1 billion in cash, very little debt and has been aggressive in bringing costs more in line with revenue over the past year.
The company posted a $5 million profit in the first quarter even though sales fell more than expected to $371 million as the firm slashed jobs and reduced executives' compensation.
Steven Aldridge, an analyst at Hilliard Lyons, has a hold rating on the stock but believes it is "slightly undervalued" after the recent selloff. Tellabs trades at 64 times this year's expected operating earnings but changes hands at 30 times 2003 estimates.
Meanwhile, competitors like
continue to hemorrhage money.
This Tough Environment
Analysts remain cautious on Tellabs' stock, in part because of the general malaise in the telecom sector but also because questions remain about Tellabs' next-generation product line.
In an attempt to boost sales of its main product, Titan 5500, the company bought Ocular Networks for $355 million in November, and it recently developed a new all-optical core switch. Still, analysts aren't convinced the company will be able to compete with new products from the likes of
, Ciena or Nortel.
"Going forward, their next-generation product class is not as attractive as its competitors'," noted Chris Sessing, an analyst at Crowell Weedon. "Their old product line will go away at some point but it's probably going to take a couple of years."
Edward Jackson, an analyst at US Bancorp Piper Jaffray, said he is concerned about the "narrow customer acceptance" of the 6500 platform and said he sees few positive near-term catalysts for the stock.
And on Tuesday, Banc of America analyst Christopher Crespi lowered his revenue estimates for the rest of 2002, saying he now expects no growth in the third quarter and only moderate revenue growth in the fourth. Other analysts also have pared back their estimates after Tellabs said recently that business had slowed in the second quarter.
Tellabs, whose share price has been cut in half since the start of the year, is expected to report a second-quarter profit of a penny a share on sales of $371 million, according to Thomson Financial/First Call.