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
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

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.

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