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Cable Deal Raises Harmonic Shares

Stock jumps 40% on deal with Cox Communications. Optical investment may be returning to the cable industry

May 9, 2001

3 Min Read
Cable Deal Raises Harmonic Shares

Harmonic Inc.’s (Nasdaq: HLIT) stock jumped 38 percent to $8.14 a share today on news that cable operator Cox Communications Inc. (NYSE: COX) has agreed to buy transmission gear based on dense wavelength-division mulitplexing (DWDM) optical technology to support multiple cable system upgrades throughout Oklahoma and Kansas.

The amount of the deal was not disclosed in the release, but Michael Newman, a spokesperson from Harmonic, says the contract is a multimillion-dollar agreement and he expects most of the gear to be purchased within the next 12 months. The on-going plant rebuilds will serve more than 800,000 subscribers, once completed, and will include Cox's first rollout of a DWDM architecture.

Harmonic’s stock was already on the rise, jumping 24 percent in the last two days after the company announced on Monday that satellite TV provider DirecTV will utilize its digital TV solutions. News that Cablevision Systems Corp. (NYSE: CVC), another Harmonic customer, also plans to add more digital head ends in New York City has also helped to boost share prices, says Alan Bezoza, an analyst with CIBC World Markets.

“I’m bullish on the entire sector,” says Bezoza. “It’s a good time to get in there.”

The additional business is great news for Harmonic, since it has suffered in the last several months as two of its larger customers AT&T Broadbandand RCN Corp.have cut their capital spending budgets (see CIBC: Harmonic out of Tune). Cox, on the other hand, has never been a big customer in the past, and the agreement should open up a wave of untapped revenue for the company, says Bezoza.

“This is a big win for the company, an important win,” he says. “My only concern is at what price did they win the contract? Did they have to undercut everyone else’s pricing? I just don’t know yet.”

Bezoza says the major rebound in the sector will happen when providers like AT&T Corp. (NYSE: T) start spending money again on upgrading their networks. This could be sooner rather than later, since AT&T still has about 55 percent of its network left to upgrade. This should translate to an even greater upside for Harmonic, since AT&T has traditionally been one of its largest customers. Another encouraging opportunity over the next year is in Germany, where the cable market, which is about a third the size of the U.S. market, should start upgrading its 15-year-old cable plant.

“I think the Street sees these deals as confirmation that the cable companies are still spending,” says Harmonic's Newman. "It might be less than it was 18 months ago, but we’re hopeful that the cycle will reverse itself and we’ll see even more spending.”

Harmonic’s competitors -- Antec Corp. (Nasdaq: ANTC), C-Cor.net (Nasdaq: CCBL), CommScope Inc. (NYSE: CTV), and Motorola Inc. (NYSE: MOT) -- should also benefit from the turnaround, says Bezoza. In fact, some of their stocks already started feeling the impact today. Antec rose to $9.45, up 9.88 percent; C-Cor.net finished at $8.46, up 5.8 percent; and CommScope finished the day at $20.28, up 5.9 percent. Motorola was down 1.72 percent to $16.03.

But even with Harmonic’s stock on the rise, it still has a lot of ground to make up. A year ago its shares traded around $63.

-- Marguerite Reardon, Senior Editor, Light Reading

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