Analysts See Upside in Test Vendors

Investors looking for signs of life in the telecom market should check out the test-and-measurement sector, as analysts paint a rosy picture for vendor Tektronix Inc. (NYSE: TEK) -- following its acquisition of Inet Technologies Inc. -- and see growth at Spirent Communications.

Tektronix has been evaluating the financial impact of the Inet acquisition, announced in June, and predicts that its earnings per share (EPS) for its second quarter of fiscal 2005, which ended last week, will be hit by between 2 and 4 cents as a result of the deal (see Tektronix Acquires Inet for $325M and Tektronix Guides on Inet Impact).

That might not seem like good news, as it has forced analysts to reduce their EPS estimates for the full financial year. But the team at Wachovia Securities Inc. is looking longer term and believes that Inet, which like Tektronix has a history of profitability, will contribute meaningful earnings in the future.

In a research note, the Wachovia team notes that, while it has reduced its EPS estimate for the financial year 2005 to $1.52 from $1.57, it has increased its estimate for 2006 to $1.99 from $1.88.

Analysts at McAdams Wright Ragen Inc. agree that the Inet acquisition will boost Tektronix's financial performance in its 2006 fiscal year and have maintained their Buy rating on the stock with a target price of $38.

The share price now stands at $31.83, down 65 cents today.

The vendor, which acquired Inet to gain network performance monitoring and VOIP test products and expertise, is due to announce its second-quarter results on December 16. Analysts are expecting revenues of $256 million and an EPS before charges of 32 cents.

Spirent plc (NYSE: SPM; London: SPT), meanwhile, is currently undervalued, according to analysts at UBS AG. They believe its telecom test business, Spirent Communications, will exceed sales forecasts and have set a share price target of 81 pence on the London Stock Exchange, more than 10 percent higher than today's closing price of 72.75 pence.

The increasing rollout of VOIP and broadband are the most likely catalysts for better-than-expected sales. Along with other test vendors, Spirent has been very bullish about increasing demand for its VOIP performance analysis products and services, a niche area that's set to experience significant growth in the coming few years (see Spirent Ups VOIP Test Ante and Report Touts VOIP Test Market ).

And Spirent, one of the shortlisted companies in Light Reading's Leading Lights Awards, has turned a corner on its finances in general, having posted a profit for the first half of 2004 (see Spirent Reports Interim H1 Results and LR Best Product Finalists Revealed).

It's not the only test vendor to have reported improving financials in the past few months as carriers start spending more on checking out new systems and services (see Radcom Cuts Q3 Loss, Ixia Q3 Revenues Rise, EXFO Cuts Losses in Q4, and Empirix Has Growth Spurt).

— Ray Le Maistre, International News Editor, Light Reading

For the latest intelligence and analysis of next-generation telecom market opportunities, check out the coming Light Reading Live! event: Light Reading's Telecom Investment Conference, at the exclusive Plaza Hotel in New York City, on Wednesday, December 15, 2004.

For more information on the Leading Lights Awards, click here.

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