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)
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. (For another way to profit
from the booming smartphone market, see "Stock #5" in this
report. The company gained more than +150% last year and is
poised to crush the S&P 500 again in 2010.)
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)
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
Disclosure: David Sterman does not own shares of any security
mentioned in this article.
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