Just look at the Light Reading Index: up 14 percent since the beginning of 2003, but down 11 percent in 2004. Clearly, it's been more of a trader's market than an investor's market.
Putting together an investment strategy in telecom equipment, then, is no easy task. For the Leading Lights Awards category for Best Investment Potential, Light Reading editors and Heavy Reading analysts decided to take a portfolio approach connected to growth areas of telecom – identifying the hottest sectors, then pegging the hottest companies in those areas.
With the telecom world migrating to a packet infrastructure, IP routing and VOIP were among the chic neighborhoods to scope out, as was wireless. From there, it was just a matter of finding the companies that are well positioned in emerging equipment categories, or those with strong product portfolios overlooked by the market.
The winner will be announced at an Awards Dinner following Light Reading's Telecom Investment Conference in New York City on December 15.
ADVA's a sensible company that aims to grow at a steady pace, has good products, and doesn't make too many foolish, bubble-headed mistakes. That's our kind of company (see LR Picks Public Marketing Stars, ADVA Reports Improved Results). Now, if only it didn't trade in Frankfurt!
Light Reading editors have a sneaking suspicion that ADVA won't hide in the hinterlands of Europe forever. In the meantime, you're getting that "European discount" on a company that is really global but trading at a meager market capitalization of €159 million ($207 million), which puts it at about twice trailing twelve-month (TTM) sales. It has recently increased both revenues and profitability, and it's beefed up its metro optical portfolio with some Ethernet and access gear (see ADVA Boosts Revenues in Q2, Ethernet Monday: ADVA, WWP, and More, ADVA Launches FSP 150, and ADVA Grows, Says It's Organic ). ADVA's got one foot in the enterprise market and one foot in the telecom market, giving it a diverse customer base.
A solid standing as the No. 2 metro DWDM player, behind Nortel Networks Ltd. (NYSE/Toronto: NT), and a reseller agreement with Siemens AG (NYSE: SI; Frankfurt: SIE) put ADVA in a nice position for bigger things, either as an acquisition target or as a company that could expand on its own and list shares on a North American market. This may be one of the few optical networking investments out there that involves a profitable company with a reasonable market cap.
What would an investment idea list be without a dark horse with the potential for big returns? Carrier Access, a small access equipment vendor in Boulder, Colo., has been on a wild ride, rising from penny-stock status in 2002 to an all-time high of $18, which it reached earlier in 2004.
No doubt about it, this company has been in growth mode (see 2003 Top Ten: Explosions & Implosions). Its multiservice access products, which combine routing and multiplexing functionality, have drawn some decent customers, including Cingular Wireless and Ericsson AB (Nasdaq: ERICY). In announcing its third-quarter results, Carrier Access reported that net revenue for the first nine months of 2004 was up 106 percent to $81 million, from $39.3 million during the same period last year. Unfortunately, the company did revert to a loss in the third quarter – $3.8 million, or 11 cents per share, compared with net income of $702,000, or 3 cents per share, in the prior year's quarter – and its revenue growth paused at $21.6 million. The company has plenty of cash, with $120 million in the bank.
More recently, Carrier Access shares took a nasty haircut on the departure of the CFO (see Carrier Access CFO Quits). This could be a good time to pick up shares at a discount – the stock is now trading at three times TTM. As long as there are no skeletons in the CFO's closet, it could prove to be the best opportunity to get small-cap growth stock in the past two years.
Like ADVA, ECI is a bit off the beaten track and doesn't get much attention. Much of that obscurity may stem from its aborted, bubble-era plans to create a set of subsidiary IPO spinoffs in North America. The telecom recession killed that idea, and ECI called its subsidiary children home for consolidation, leaving the company with two divisions – optical and broadband – and an investment in newly created softswitch firm Veraz Networks Inc. (see ECI Reports Burnin' Earnings and ECI, NexVerse Become Veraz).
So far, Plan B appears to be working. Two years after its restructuring, the Israeli company is on the verge of profitability and has footholds in key emerging markets including India, as well as in big-ticket projects such as BT Group plc's (NYSE: BTY; London: BTA) 21CN network. It's participating in the hip fiber-to-the-premises (FTTP) market, and it has scaled down its multiservice provisioning platforms to fit the times. ECI's global distribution network and solid product portfolio is also attracting the interest of partners such as Nortel, with which ECI has an OEM agreement. (See Lehman Says India's Hot Stuff, BT Selects ECI for FTTP Trial, Kyivstar Picks ECI's Gear, and ECI Intros Small MSPP.)
The investment numbers are intriguing, too. ECI's closing price on the Nasdaq was $8.28 on Tuesday, giving the company a price-to-sales ratio of just 2, according to Reuters Research. Sales are down from the bubble days – just $128 million last quarter, for about half the run rate it had in 1999 – but a market cap of $896 million is certainly respectable for a company that could have shattered after the crash. ECI seems to have strengthened its position in the past year, and it's in a solid position for growth.
Juniper isn't exactly a secret on Wall Street, but the trick here is that the company is graduating from Cisco Systems Inc. (Nasdaq: CSCO) gadfly status to being an incumbent, as CEO Scott Kriens's moves this year appear to be setting the company up for bigger things.
The product line and vision have broadened considerably. Juniper is tackling the enterprise with the NetScreen Technologies acquisition and the J-series routers. It's bolstering its carrier-router heritage with the M320 for the multiservice edge and a multichassis router (expected to debut, well, any day now) to counter Cisco's CRS-1. On the vision side, Juniper has launched the Infranet Initiative, taking the lead in trying to create a new, adaptive kind of public network. (See Juniper Buys NetScreen, Juniper's 'Pepsi' Set to Pop, Juniper Hatches the M320, Juniper's TX Waits Its Turn, and Juniper's Infranet Takes Baby Steps.)
Admittedly, it will take a surge of products to make a Juniper bet pay off – with a $28.47 closing on Tuesday, the stock carries a price-to-sales ratio of 12, versus 6 for Cisco. But anybody looking to invest in telecom equipment needs an IPO routing investment, and the only other blue-chip name, Cisco, carries one of the largest market caps in the world, at a recent $126 billion. Cisco faces major challenges in maintaining a high growth rate, especially with the bulk of its business in the enterprise market. Juniper, meanwhile, keeps piling up points in its favor, with solid earnings reports and prestigious core-router wins (see Juniper Q3 Tops Estimates, Juniper Trumps Cisco's China Deal, Juniper Claims Top Spot in Asia, and T-Com Touts Juniper Backbone).
Nextel is the leading enterprise-focused cellular carrier in the United States. Unlike consumer-driven wireless rivals, Nextel has largely eschewed the "mobile Internet" and other flashy gimmicks, in favor of applications that its enterprise and blue-collar subscribers could actually use, such as the digital walkie-talkie-like push-to-talk service. The numbers trumpet the success of Nextel's steely focus, as the carrier pulls in an average revenue per user (ARPU) per month of just less than $70, compared to the $50 per month eked out by most other wireless providers.
The U.S. cellular industry is undergoing a period of colossal consolidation that many analysts predict will not stop with Cingular's $41 billion buyout of AT&T Wireless Services Inc. (NYSE: AWE). Nextel – with its extensive and profitable enterprise user base and rock-solid brand identity – is seen by as many as an attractive acquisition target. Rather than rest on its laurels, Nextel is considering a leaner and meaner wireless landscape with its successful trial of so-called fourth-generation (4G) wireless broadband technology from startup Flarion Technologies. That technology got tested as part of Nextel's search for a suitable next-generation upgrade for its iDEN network (see Nextel Eyes $1B Network Saving).
Standard & Poor's recently upgraded Nextel to a five-star Buy rating based on its potential to rise, particularly as the carrier finally lays out its 3G strategy – a move expected in the first quarter of 2005. Given Nextel's differentiation in the marketplace, it's one of the better wireless investments out there.
With IP telephony all the rage, this category wouldn't be complete without a VOIP system vendor. Tekelec, courtesy of the recent acquisition spree that garnered it another shortlist entry, fits the bill nicely. It's got more cash and a wider portfolio than competitor Sonus Networks Inc. (Nasdaq: SONS), which suffered some accounting problems this year, giving Tekelec the nod as an investment with lots of exposure to the VOIP world (see LR M&A Strategy Finalists Step Up and Tekelec Connects With VocalData).
Traditionally a signaling system player, Tekelec is in growth mode. Following the acquisitions of Santera, Steleus, Taqua, and VocalData, it has a technology portfolio that's set to boost the bottom line as carriers build out new IP-based networks (see Tekelec Tops $100M). And analysts predict a hefty increase in revenues in 2005: Estimates tabulated by Reuters show Tekelec hitting $396 million this year and $507 million in 2005, with earnings per share of 63 cents in 2004 and 73 cents in 2005.
Revenues have grown in previous years, too, as has the share price. Tekelec recently traded at $25.19, valuing the company at $1.6 billion, compared with a share price of $16.31 a year ago and $9.99 two years ago. Trading at a recent price-to-sales multiple of roughly 5, Tekelec isn't cheap. But it's the vendor that appears best positioned for the coming VOIP boom.
— The Staff, Light Reading