Takeover Speculation Sends Fiber-Optic Stocks Sky High - TheStreet

SAN FRANCISCO -- The takeout speculation in fiber-optic stocks has gotten a little ahead of itself.

With

consolidation rampant in this high-growth sector, investors are bidding up shares of the few remaining public companies engaged in optical ventures to speed Internet traffic. However, much of the buying appears misguided because the coveted companies still haven't shown that their ventures are commercially viable.

That's why it's hard for analysts to justify jumps of 200% to 2300% since early November in stocks such as

Spectra-Physics Lasers

(SPLI)

,

Coherent

(COHR) - Get Report

and

Precision Optics

(POCI)

.

There's little doubt that players such as

JDS Uniphase

(JDSU)

and

Corning

(GLW) - Get Report

are prowling for acquisitions in a market that already exceeds $4 billion in yearly sales. Two recently announced deals will help JDS Uniphase increase its revenue 118% to $1.3 billion in the fiscal year ending June from the prior year, according to estimates from

J.P. Morgan

. Its market capitalization has jumped 20-fold to $74 billion in two years.

But JDS Uniphase has succeeded by buying proven operations. And the companies now in investors' sights as possible takeover candidates still haven't fully developed ventures in the arcane science of fiber-optic components -- tiny instruments that pack extra light beams into the glass strands on a network.

With enthusiasm at giddy levels, some professionals have lost perspective in the hunt for investment opportunities.

"I've seen hedge funds just search for the word 'optics' and just buy those stocks," says Charles Willhoit, who covers the optical sector for J.P. Morgan. His firm has no banking ties to the companies discussed. Willhoit rates JDS Uniphase a buy, but does not cover the smaller players such as Precision Optics. "There's no fundamental work being done on

some of these guys."

Right now many of the highfliers such as Spectra-Physics "are still in the phase of fine-tuning their manufacturing process," adds Richard Faust, equity analyst with the investment bank

Adams Harkness & Hill

. His firm has no banking ties to the companies discussed.

The market value of Spectra-Physics, based in Mountain View, Calif., has more than quadrupled to $759 million in four months. The company expects to ship $5 million to $10 million of new components, including optical filters and amplifiers, in 2000.

But it is recovering from a turbulent performance in the semiconductor and disk-drive markets last year, when revenue eroded 16% to $141.3 million. CEO Patrick Edsell says 1999 was a "pretty ugly year." But he adds the company used the occasion to reposition itself for the fiber-optic business, a work still in progess.

Edsell declined to comment on the possibility of a takeover. His company is majority-owned by

Thermo Electron Corp.

(TMO) - Get Report

a technological conglomerate that could not immediately be reached for comment.

Santa Clara, Calif.-based Coherent, with a market capitalization up more than three-fold to $1.8 billion in four months, is adding fiber-optic technology to its strong array of optical offerings for the medical and semiconductor industries. "We're probably behind the curve here," says John Ambroseo, a Coherent president overseeing the fiber-optic operations. While the company intends to catch up, Ambroseo still expects to generate less than 5% of Coherent's expected revenue of $530 million from fiber optics in the fiscal year ending September. A Coherent official declined to comment on a takeout, but said it is unlikely the company would break off the fiber-optic division for sale.

Precision Optics, up roughly 25-fold in market capitalization to $221 million, is slowly filling a $1.6 million order for optical filters. But with its revenue down 20% to $2.8 million last year, Precision has not proven itself as a viable player in its medical or related business, much less fiber optics.

Analysts say these companies need another six to 12 months to develop.

"Those players that can demonstrate that they can produce

fiber-optic components in volume will be viable takeover candidates," Faust says. For example, on Monday the little-known

NetOptix

(OPTX)

said it will fold into the conservative, 63-year-old telecommunications supplier Corning for stock worth $2.1 billion. While NetOptix has an erratic quarter-to-quarter sales record and revenue of just $39.5 million the last four quarters, executives say it makes light filters more efficiently than Corning. Faust has rated NetOptix a strong buy since starting coverage in December.

By and large, the companies viewed as new targets lack the maturity of NetOptix. In today's overheated stock market, that hasn't diminished the speculation, however.

"As long as a) the euphoria for optical components companies exists, and b) the consolidation exists, there's a potential for them to get taken out," says Willhoit. "And that's what hedge funds are betting on."