Overview
CommScope, Inc., is a designer, manufacturer and marketer of a line of coaxial, fiber-optic and other high performance electronic cable products for cable television, telephone, Internet access, wireless communications and other broadband services. It supplies fiber-optic cables for Hybrid Fiber Coaxial (HFC) cable networks and developed fiber-optic products for telecommunications applications. CommScope also supplies coaxial cable for telephone central office switching and transmission applications, as well as video distribution applications such as satellite television and security surveillance. In addition, it offers a line of coaxial cables for wireless communication infrastructure applications and high-performance premise wiring for the mid-tier local area network market.
In January 2004, the Company acquired the Connectivity Solutions business from Avaya Inc. and reorganized its products into product lines that include Enterprise Solutions, Broadband Solutions, Wireless Solutions and Carrier Solutions.
CommScope is based in Hickory, North Carolina. Its website is
NOTE: CommScope’sfiscal year ends on December 30th; analysts seem to use calendar year (CY) and fiscal year(FY) interchangeably.
Key Positive Arguments / Key Negative Arguments- The trend of bad weather may actually affect the company positively once power is restored and the damage is assessed.
- CommScope has the ability to pass on price increases to its customers
- Anixter represents 33% of total sales up from 29% in the 1st quarter.
It is clear that the key to CTV is the ability to integrate new acquisitions into its business model. The company has been on an acquisition spree in the past 12 months and has not ruled out another. Several analysts feel it is important to bring the margins of the new companies up to the level of the core segments. Since the purchase method of accounting makes comparison of sequential data difficult, the core growth has been separated out in each segment.
Sales
SecondQuarter Results and Third Quarter Guidance
CommScope reported 2nd quarter revenue of $312.9 million, easily surpassing analyst estimates of $290- $300 million, and company estimates of $298 million. The 20% sequential increase in total revenues was largely driven by the Connectivity Solutions segment, which accounted for a full quarter of revenues for the first time since the acquisition.
CTV has forecast $300-$320 million revenue for 3rd Quarter of 2004.
CommScope is organized into two segments, Cable and Connectivity Solutions. Each segment is further broken down into three sub segments.
CABLE
Sales in the cable segment were $169.5 million up 25% sequentially on strength in all product categories.
Broadband
Broadband recorded revenue of $127.6 million, up 25% sequentially. Broadband made up 75% of Cable sales.
Networking
Networking Recorded revenue of $31.6 million, up 25% quarter over quarter. Networking represented 19% of Cable sales.
Management indicated that pricing for its networking cable is favorable and that demand is building some momentum. The company believes the North American networking cable market is recovering and that point of sale trends out of distribution is the best it has been in three years.
Wireless
Wireless recorded revenue of $10.3 million, up 6% sequentially. Wireless represented 6% of Cable sales.
CONNECTIVITY SOLUTIONS
Revenues from the Connectivity Solutions segment of $150.7 were up 16% and driven by strength in Systimax products.
Systimax
Systimax recorded sales of $116.7million, up 16% sequentially. This segment represented 77% of the segment total.
ExchangeMax
ExchangeMax reported sales of $15.8 million, up 40% quarter over quarter. The segment represented 10% of total division sales.
ICS
ICS revenues were down 27% sequentially. This segment represented 12% of Connectivity Solutions total sales versus 19% in the prior quarter.
One analyst who recently hosted an investor show (Smith Barney) reported management had a hard time hiding its enthusiasm when discussing the ACS transaction. In addition to the cost and cash flow benefits, they commented they have been pleasantly surprised with the quality of the intellectual property portfolio. Starting with 800 patents they believe they have a critical mass of intellectual property that should allow them to replicate the experience they had on the cable connectivity side where they were able to essentially push most of their competitors out of the market
Geographic Breakdown
Margin
Gross margin was 23.1% up from 21.8% last quarter and 20.4% one year ago. CTV cites higher sales volumes, the positive impact of a full quarter Connectivity Solutions contributions, and price increases as factors in driving sequential gross margin gains.
The company gave the following guidance for the 3rd quarter.
- Gross Margins are expected to be in the 24-25% range for the 3rd quarter assuming flat raw material prices.
- SG&A costs are expected to remain about 16-17% of sales
- R&D is expected to be about 2-3% of sales
2004E Margins
/ Gross Margin / Operating Margin / Net MarginLow Estimate / 23.20% / 5.00% / 2.00%
High Estimate / 24.00% / 5.20% / 3.10%
2005E Margins
/ Gross Margin / Operating Margin / Net MarginLow Estimate / 24.00% / 6.00% / 3.00%
High Estimate / 25.30% / 8.10% / 4.90%
Earnings Per Share
Earnings Per Share came in at $0.14 per share in the second quarter vs. $0.06 in the prior quarter. Most analysts adjusted their earnings per share estimates upward in the past 6 weeks due to the pricing increases and the positive outlook in the Connectivity Solutions segment.
FY 2004 / FY 2005Street consensus / $ 0.55 / $ 0.80
Company Guidance
Low estimate / $ 0.49 / $ 0.76
Med estimate / $ 0.58 / $ 0.94
High estimate / $ 0.65 / $ 1.10.
Long-Term Growth
Historically, CommScope has been extremely vulnerable to movements in cable operator capital spending. With the acquisition of ACS, several firms (Smith Barney, Merrill Lynch, Stifel Nicholas) feel this exposure has been reduced. CTV seems to have different demand trends than some of the other box makers. A lot of their demand seems to be derived from a pick up in commercial office builds and renovations. These trends are driven by the availability of construction financing and are not subject to month to month volatility that is seen with some of the box makers serving the enterprise space.
Target Price/Valuation
Most analysts believe CTV is on the right track, and is poised to grow margins in the second half of 2004. The majority of the analysts are using a PE to 2005’s earnings, and one is using a DCF model to value the company. The price targets range from $21.00-$24.00 per share.
Upcoming Events
Date / Event / Comments1H 05 / CommScope introduces new Fiber Optic Pavement Cable / Unique design allows a much easier installation method.
1H 05 / CommScope introduces Advanced Coring Technology. / Allows craftsmen to work without using metallic blades, torches or chemicals
Individual Analyst Opinions
POSITIVE RATINGS
Merrill Lynch-Buy ($23.00) Merrill points to improved international demand in Broadband Sales (CATV coaxial and Fiber) that benefited for the 3rd straight quarter. Price target is based on 21x 2005E EPS of $1.10.
Stifel, Nicolaus & Co.-Market Outperform ($24.00) Stifel believes CTV is on track to drive profit margins higher over the next year and achieve strong EPS growth.
NEUTRAL RATINGS
CIBC World Markets- Sector Performer Analyst expects continued strong momentum from CommScope over the next several quarters. CIBC looks for improving gross margins, acquisition synergies, and working capital improvements in the Connectivity Solutions group.
Smith Barney- Hold ($21.00) While CTV had a strong quarter; analyst is on the sidelines due to the lack of clarity on long term gross margin expansion and revenue growth.Price target is based on two methodologies DCF and comparable valuation analysis. Inputs for the DCF method are 4.5% equity premium, 4.1 % risk free rate, 1.2 beta, 4% perpetual growth.
NEGATIVE RATINGS
None