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Thursday, June 19, 1997
Ascend
Communications HOW DID IT FIND TROUBLE? What's in a name? Irony. At least to investors of Ascend who have watched their stock descend in recent months. Earnings shortcomings from its networking peers have rattled the sector, taking Ascend down for the ride as speculators are switching out of the switch-makers. As a matter of fact, the only time a name stood for something was when the company announced the acquisition of CASCADE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCC)") else Response.Write("(Nasdaq: CSCC)") end if %>. Then, fittingly, the stock price cascaded. Despite a strong first quarter and later assuring shareholders that the company was on track for solid fiscal 1997 performance, Ascend's positive outlook could not out muscle the negative sentiment cast over the industry. Then on June 6 the company gave investors reasons to disconnect when it announced that a software glitch had held back the shipment of its MAX-TNT product lines. While the delay simply meant that the quarter would be "back-end loaded," with the bulk of sales coming at the end of June, the uncertainty was enough to rock the already shaky confidence of Wall Street and added to Ascend's descent. BUSINESS DESCRIPTION California-based Ascend Communications is a leading maker of wide-area network (WAN) products. Its MAX-TNT products allow users to easily exchange voice, video, and data within their networks. Ascend has been on an acquisition binge, having closed on purchases of InterCon Systems and Whitetree Communications earlier this year. On March 30, it announced that it would acquire Cascade Communications. FINANCIAL FACTS Income Statement
12-month sales: $657.8 million
12-month income: $130.9 million
12-month EPS: $1.03
Profit Margin: 19.9%
Market Cap: $5149.1 million
Balance Sheet
Cash: $241.9 million
Current Assets: $647.9 million
Current Liabilities: $107.8 million
Long-term Debt: N/A
Ratios
Price-to-earnings: 41.4
Price-to-sales: 7.8
HOW COULD YOU HAVE SEEN IT COMING? The stock's bottom of $36 1/8 in April and return to a $38 1/4 low in June coincided with bleak announcements from fellow networking equipment companies. 3Com started the networking fears in early Feburary when it warned of slowing sales, and negative perceptions of the sector were reinforced when FORE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FORE)") else Response.Write("(Nasdaq: FORE)") end if %> and later CABLETRON SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %> releasing ominous warnings about their pending quarters. Investors were noticeably spooked out of the entire sector. However, Ascend was painting a different picture. In April it reported a solid first quarter, with revenues and income doubling and topping analyst earnings estimates by three cents a share. In May, CFO Robert Dahl addressed industrywide concerns by stating that the company was on track to earn $1.60 to $1.70 this year. That was better than the $1.59 consensus estimate. In most sectors investors may have welcomed a company that was bucking the trend. Here, it was a bucking bronco. A wild ride indeed. In an industry that sets out to get users connected, it seems the stocks are linked together as well. WHERE TO FROM HERE? Despite the upbeat words last month, analysts have not budged from their $1.59 per share earnings estimate. So that poses one of two scenarios. Either Ascend beats the pros like it did in the first quarter, or Mr. Dahl will have to ponder whether he would like the egg on his face to be scrambled or sunny-side-up. There is still some uncertainty now regarding the problem with its 56k modem cards that temporarily held back its MAX-TNT shipments, and cynical analysts question the costs involved in Ascend's decision to provide free upgrades to the faster speed modems. Hambrecht & Quist analyst Joe Newell has called Ascend and Cascade "broken stocks," as well as raising doubts about whether MAX-TNT systems were even shipping after the modem cards were fixed. But then again, this is the same market that punished Ascend for what some see as a shrewd purchase of Cascade. The synergy was not lost on Randy Befumo (TMF Templr) when he wrote, "The combination of Ascend's wide-area network (WAN) and remote access gear combined with Cascade's carrier-class ATM switches allows the company to provide end-to-end WAN solutions -- a distinction previously held by CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> after its purchase of Stratacom." So maybe there will be some truth to stock names after all. Maybe Ascend will rise, no doubt accompanied by most in the sector, along with investor confidence. -Rick Aristotle Munarriz ([email protected])
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