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Published: February 26, 2010
We can all be thankful for the remarkable
rebound in the stock market, which has helped to rebuild many
portfolios during the past 11 months. Stocks may power yet
higher if the economy is indeed on the mend, but concerns remain
that we’re due for another slowdown. In a time like this, you
may as well stick with stocks that possess
leverage to an economic upturn, but are likely to hold their
own if the market cools off. You can find those “safe stocks” by
looking for
balance sheet strength.
With its mountains of cash telecom equipment maker Tellabs (Nasdaq:
TLAB) is one company that provides comfort.
Tellabs was early to the internet/telecom revolution, providing
high-end gear to phone companies since 1974. The company has
always sought to increase the efficiency of those networks, and
was a key player in the effort to help voice networks handle
increasing volumes of data. Of course, it’s been a long time
since that industry was in high-growth mode, which explains why
this stock once fetched more than $80 but now trades for less
than $7.
Though the days of sizzling growth are over, Tellabs looks set
to start growing at a moderate pace in the years to come. That’s
because the company is rolling out gear that helps telecom
providers handle the rising volume of data that is being pushed
out to mobile devices such as Apple’s (Nasdaq: AAPL)
iPhone and Research in Motion’s (Nasdaq: RIMM)
Blackberry. Telecom operators are having a hard time keeping up
with the explosive demand for faster speeds and large video
files that are increasingly being viewed on mobile devices.
Apple’s coming iPad tablet, along with a raft of similar
products, should only stoke mobile traffic even higher.
The economic slowdown led Tellabs’ customers to defer any
non-essential spending, which explains why sales fell another
-12% in 2009 to around $1.5 billion. But the sales plunge
appears to be at an end. Management expects first-quarter sales
to be around $370 million, roughly $10 million above year-ago
levels. That would mark the first year-over-year quarterly
increase in several years. As a result, sales and earnings
estimates, which had been steadily falling, are now starting to
rise. Management’s confidence is aided by the fact that
book-to-bill, which compares incoming orders to actual sales,
was above 1.0 in the fourth quarter of 2009.
To be sure, Tellabs’ sales rebound will likely be modest,
perhaps in the +5% to +10% range once the economy is truly back
on sustainable footing. But that should be sufficient to drive
profit growth at a faster clip. That’s because management has
been steadily cutting costs, which is giving a clear boost to
gross margins and operating margins. In the most recent quarter,
gross margins rose 370 basis points from a year earlier to
45.2%. Gross margins were also aided by a shift in the sales mix
to newer cutting-edge products. Operating margins, which were
barely positive a year ago, hit an impressive 9.0% in the most
recent quarter. And they could exceed 10% in coming quarters, as
management plans to shed an additional 200 jobs.
Rising profits are being aided by an ever-shrinking share count:
The company bought back 12 million shares in 2009, and is
expected to keep buying stock in 2010 as well. That’s the
benefit of having a super-strong balance sheet. Tellabs’ has
more than $1.3 billion in cash. That accounts for exactly half
of the company’s market value. So if the economy cools and the
stock market pushes this stock back down, then the company’s
ongoing stock buyback program will simply be able to buy an even
greater number of shares.
Meanwhile, shares trade at a discount to rivals Ciena (Nasdaq:
CIEN) and Adtran (Nasdaq: ADTN). Tellabs’ enterprise
value (market capitalization plus debt minus cash), as a
percentage of projected 2010 sales, is below 1.0, while those
other firms trade at 1.2 times and 2.3 times, respectively. And
enterprise value, as a multiple of operating cash flow, is just
5.5 times for Tellabs, while that ratio is 96 times and nine
times, for its respective rivals.
A strong balance sheet, attractive valuations, and a brightening
sales picture? What more could a value investor ask for?
-- David Sterman
Contributor
StreetAuthority |
