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Tellabs Worth A Look

In a year in which networking and telecom equipment stocks have imploded, Tellabs has held up remarkably well. It's also a heck of a lot cheaper than the competition.

With Nortel and Lucent losing money and Cisco Systems barely clinging to profitability, Tellabs continues to earn 30-40 cents a share each quarter. And at a price-to-earnings ratio of 21, it's a whole lot cheaper than Cisco's PE of 48.

Tellabs is also no slouch when it comes to technology, boasting first-rate optical, broadband, and switching equipment. And demand remains strong for its core crossconnect equipment. But the company was largely left out of the Internet stock boom that swept Cisco, Nortel, Lucent and others to dizzying heights. The plus side is that it has also escaped the kind of downside damage that those stocks have sustained, both in earnings and stock price. Tellabs is slightly less than 50% off its all-time high, compared to declines of greater than 80% in Nortel, Lucent and Cisco.

The difference between Tellabs and the others is that Tellabs never courted the fast-growing but debt-laden next-generation service providers and CLECs. The 26-year-old company sells largely to old stalwarts like the Baby Bells and long-distance companies. And if you think that's boring, think again: the Baby Bells are steady performers that may well wind up winning the telecom war, providing Tellabs with a strong customer base for some time to come.

Tellabs may be a whole lot cheaper than other telecom equipment stocks, but using the PEG ratio discussed yesterday, the company isn't exactly cheap, with a predicted annual growth rate of about 6% over the next two years. But again, the company's holding up much better than Lucent, Cisco and Nortel, all of which will see earnings decline 80% or greater over the next couple of quarters.

Perhaps more than any other technology sector, telecom equipment is suffering from an overinvestment hangover. When the economy improves substantially, valuations across the sector will no doubt improve. When that happens, it's interesting to note that Tellab's long-term projected growth rate of 26% is in line with Cisco's and Nortel's long-term projections.

A quick look at Tellabs' chart indicates that 40-44 should be tough resistance, while 36 should now be support.

In the 1990s, it made sense to own Cisco while skipping Tellabs. In the new millenium, the opposite may turn out to be the case.