Editor's Note: We've recently launched TheStreet.com Stocks Under $10, a new stock-picking email alert service. Our in-house research team is building a portfolio of stocks that are priced under $10 and will alert you to every trade they make and why. But that's not all: Our investment team will also issue alerts of stocks under $10 that should be avoided.
TheStreet.com Stocks Under $10 is normally $299.95 for an annual subscription. If you sign up before June 30, you can pick up an annual subscription for $249.95. If you subscribe to Action Alerts Plus, RealMoney and our premium newsletters, you can save $100 off an annual subscription through June 30 ... just $199.95.An alert published earlier today appears below. Act now to lock in your savings. Click here for a free trial.
Whenever we have a chance, we'll use this service to point out a stock that, while not a buy now, you should watch along with us for a buying opportunity down the road. Because as tempting as some stocks may seem, we have to be disciplined in our approach and not put money to work in a name that, despite an attractive acquisition and reasonable valuation, will be dead money in the near term.
Until last week,
was viewed by investors and analysts as an overvalued company that was mature in its life cycle and lacked the new-product growth needed to command a premium multiple. But thanks to the cash and stock acquisition of
Advanced Fiber Communications
announced last week, this has changed. Tellabs now has its hand in one of the hottest areas out there, fiber to the premises (FTTP): the technology that increases the speed of data delivery.
Tellabs, a telecom-equipment provider that is leading the shift to broadband, has been hurt over the past three years by the depression in spending. During this period, the stock has dropped from its high of $77 a share and now fallsinto the under-$10 category at $7.70. Tellabs managed to keep costs under control, and with $1.1 billion in cash at the end of the first quarter, was well positioned to make the $1.7 billion acquisition that included $7 a share in cash.
On a premerger basis, Wall Street analysts focused on the company's lack of new-product development and a valuation that was not supported by growth forecasts. However, the most recent quarter revealed the strength of Tellabs' operating leverage. Sales increased 19% year over year to $264 million in the first quarter with Transport sales, its core North American products, up 28% from the year-ago period, translating into a 3-cent profit vs. a year-ago loss of 10 cents a share.
AFC brings to the table its FTTP and remote terminal DSLAM business. The 2.8 times sales Tellabs paid, after backing out the cash, appears to be a bargain. AFC's stock was trading at a high of $26.60 a share not too long ago. The company has been selected by
, which plans to spend $1 billion in 2004 to roll out FTTP as its primary supplier of access equipment.
AFC will benefit from Tellabs' broad international business, which represents approximately one-third of sales. This could help it expand operations overseas, where it lacks infrastructure to gain any traction with overseas customers.
When the deal closes in the second half of 2004, Tellabs said it expects 7% to 10% pretax operating cash-flow growth in 2005, although it will be dilutive on a GAAP basis. Based on pro forma estimates, the company could have sales in excess of $1.8 billion and earnings of 35 cents a share.
At 22 times 2005 estimates, Tellabs stock looks attractive. Why are we not adding it to the portfolio? While the combined company scores well on its fundamentals and management has executed well through a difficult period, the stock price is going to be capped by the usual merger-related pressure. That said, it should be on your watch list, as it is ours, heading into the second half of the year.
TheStreet.com Investment Team is David Peltier and Will Gabrielski.