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Personal Finance > Investing
In Focus: ADC Telecom
November 29, 2000: 4:45 p.m. ET

Michael Ching of Merrill Lynch talks about telecom equipment maker ADC
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NEW YORK (CNNfn) - Shares of ADC Telecommunications jumped 7 percent in early afternoon trading Wednesday after the telecom equipment maker posted fourth-quarter earnings that soared amid surging sales of broadband connection products.

However, Michael Ching, a telecom equipment analyst with Merrill Lynch, said overall sentiment in the telecommunications equipment group remains uncertain.

In Focus airs daily on CNNfn's network at 12:10 p.m. The following includes comments made both during the show and in the pre-show interview.

CNNfn: ADC Telecommunications' pro forma net income in 2000 came in at a record 18 cents per diluted share, up 94 percent from same time last year and beating Street estimates by a penny -- is that what you were expecting?

Ching: Yes, this company on Nov. 2 already had pre-announced that results would be good, but these results came in better than the pre-announcement level -- that's good news. I don't think there was a lot of doubt of what they would report on the October quarter. People were more interested in their outlook on fiscal 2001.

CNNfn: The company has said it's expecting 12 cents a share for the first quarter of 2001, a penny below estimates -- does that concern you?

Ching: When a company goes into a new fiscal year I usually don't pay too much attention to the quarter. Most companies are going through an annual budget-planning process at the start of the year so I focus more on the full-year numbers when we go into a new fiscal year. The consensus estimates out there don't include my estimates, and the company's number is constant with mine.

ADC has three major divisions all firing on all cylinders:

 
  • Broadband Connectivity sales increased 102 percent to an all-time high of $573 million.
 
  • Broadband Access and Transport sales increased 22 percent to an all-time high of $289 million.
 
  • Integrated Solutions sales grew 48 percent to an all-time high of $170 million.
Broadband Connectivity had the strongest growth but the biggest surprises came in the other two segments: Broadband Access and Transport and Integrated Solutions. What's interesting about that is this is a company that has a broad portfolio of products and a diversified customer base. I don't think there's a single product I would point to as the driver of the solid demand we're seeing. The Broadband Access and Transport division has products that supply systems to companies like MediaOne or Verizon or Worldcom, so they have a broad product portfolio within the group, and each one of them is driving the traction. The Integrated Solutions division does software support needed to run the networks back-office stuff.

CNNfn: ADC Ventures increased their strategic investments in the quarter -- what's the strategy behind this?

Ching: ADC (ADCT: Research, Estimates) has been very acquisitive. There are strategic reasons for this venture arm -- if it can turn a profit all the better, but it's more for strategic reasons. ADC wants to be in the flow of new product development and a good way to do this is to seed that development. It will also put them in a good position to partner with an emerging company by being an early investor.

CNNfn: North America and Europe remained ADC's largest sales regions in the quarter -- how is ADC doing internationally?

Ching: International is about 22 percent of sales for ADC. This company has historically had among the lowest international exposures but it's a focus area for them now. We forecast that international markets will grow faster in terms of telecom spending, so it's good that ADC is increasing their international presence.

CNNfn: ADC stock moved up almost two points this morning, but at around $19 its way below the 52-week high of $49 -- what's your outlook for the stock?

Ching: There's a black cloud hanging over the communications equipment group relating to the capital expenditure outlook for 2001. Operators are indicating that cap ex [capital expenditure] will be lower next year than this year. I don't think we'll be able to figure out the impact of that until early next year, which puts the sector in a trading range until the end of the year. We think that as we go into the beginning of the year and get more clarity on cap ex spending, it will look better than what people are predicting now. ADCT is trading at a reasonable valuation but it needs a catalyst to get it to trade higher.

CNNfn: What are your favorite stocks in the communications equipment sector?

Ching: Cisco Systems (CSCO: Research, Estimates), Nortel Networks (NT: Research, Estimates) and Motorola (MOT: Research, Estimates).

- Reporting by CNNfn's Carmina Perez  graphic

* Disclaimer

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