tellabs, inc 4/1/02 al goldstein economic overview economic recovery is expected in 2002 –strength...
TRANSCRIPT
Tellabs, Inc
4/1/02
Al Goldstein
Economic Overview
Economic Recovery is expected in 2002– Strength of recovery is uncertain– Stock markets have surged tremendously since
October– Prices have grown faster than earnings
Conditions likely to favor companies who quickly rebound with strong profitability (difficult for technology sector)
Business Overview
Tellabs, Inc. designs, manufactures, markets and services optical networking, next-generation switching and broadband access solutions
The Company also provides professional services that support its solutions
Vital Stats
Price = $10.45 Sales (ttm) = $2.2 billion NI (ttm) = -182 million Profit Margin (ttm) = -8% EPS (ttm) = -$0.45 P/E = NA Current Ratio = 6 Market Cap = $4.3 billion 5 Yr Expected Earnings Growth = 16%
Original Proposal
Buy 400 shares @ 57.125 on March 10, 2000
Justification– Global solutions provider to telecom
service providers (strong growth industry)– Surpassed 2000 sales goal of $2 billion– Named one of S&P’s best performing
stocks by Business Week/Investors Business Daily
Recent Events
Company hurt tremendously by the suffering telecom industry
Balance sheets is still very strong– $700 million in cash and virtually no debt
Changing industry dynamics has limited future growth and visibility
Customers are still not spending and the recovery is uncertain
Base Case Valuation1 2 3 4 5 6 7
2002 2003 2004 2005 2006 2007 2008
EBIT 89.3 253.0 293.5 340.5 394.9 458.1 531.4
% growth NA 183.3% 16.0% 16.0% 16.0% 16.0% 16.0%
- Taxes (31.3) (88.6) (102.7) (119.2) (138.2) (160.3) (186.0)
+ D & A 110.2 119.9 137.1 185.9 213.6 245.8 283.1
+ Changes in Working Capital 102.5 (40.3) (70.9) (82.2) (95.3) (110.6) (128.3)
Operating Cash Flow 270.7 246.0 257.2 325.2 375.2 433.1 500.4
- Capital Expenditures (244.2) (171.8) (174.3) (173.3) (201.1) (233.2) (270.6)
Free Cash Flow 26.5 74.2 82.8 151.8 174.1 199.9 229.8
% growth NA 179.9% 11.6% 83.3% 14.7% 14.8% 15.0%
PV of FCF 23.0 55.6 53.8 85.3 84.7 84.2 83.8
PV (2002-2008)
growth rate Long-term Growth Rate 13.5% 14.5% 15.5% 16.5% 17.5%
Horizon Value (2009) 3.0% 6.0 5.7 5.4 5.2 5.0
PV (Horizon Value) 3.5% 6.1 5.8 5.5 5.3 5.1
4.0% 6.3 5.9 5.6 5.4 5.2
Present Value of Company = 4.5% 6.4 6.0 5.7 5.4 5.2
- Debt 5.0% 6.6 6.2 5.8 5.5 5.3
+ Cash 5.5% 6.8 6.3 5.9 5.6 5.3
Value of Equity = 6.0% 7.0 6.5 6.0 5.7 5.4
6.5% 7.3 6.6 6.2 5.8 5.5
Value/Share = 7.0% 7.6 6.9 6.3 5.9 5.6
% expected return -44.8%
470.3
Horizon Value SensitivityHorizon Value (Constant Growth)
DCF Analysis
$5.8
2375.6
1308.3
34.3
1101.6
838.0
2298.0
WACC
5.0%
Ideal Case Valuation1 2 3 4 5 6 7
2002 2003 2004 2005 2006 2007 2008
EBIT 106.2 315.0 378.0 453.6 544.4 653.2 783.9
% growth NA 196.5% 20.0% 20.0% 20.0% 20.0% 20.0%
- Taxes (37.2) (110.3) (132.3) (158.8) (190.5) (228.6) (274.4)
+ D & A 119.5 140.9 166.6 234.3 278.7 331.9 395.8
+ Changes in Working Capital 63.8 (88.2) (105.9) (127.1) (152.5) (183.0) (219.6)
Operating Cash Flow 252.4 259.4 306.6 402.3 480.3 573.7 685.9
- Capital Expenditures (261.0) (205.3) (215.6) (221.8) (266.1) (319.4) (383.2)
Free Cash Flow -8.6 54.1 91.0 180.6 214.1 254.4 302.7
% growth NA NA 68.3% 98.4% 18.6% 18.8% 19.0%
PV of FCF -7.4 40.5 59.1 101.5 104.2 107.1 110.4
PV (2002-2008)
growth rate Long-term Growth Rate 13.5% 14.5% 15.5% 16.5% 17.5%
Horizon Value (2009) 3.0% 6.9 6.4 6.1 5.8 5.6
PV (Horizon Value) 3.5% 7.0 6.6 6.2 5.9 5.6
4.0% 7.2 6.7 6.3 6.0 5.7
Present Value of Company = 4.5% 7.4 6.9 6.4 6.1 5.8
- Debt 5.0% 7.6 7.0 6.6 6.2 5.9
+ Cash 5.5% 7.9 7.2 6.7 6.3 6.0
Value of Equity = 6.0% 8.2 7.4 6.9 6.4 6.1
6.5% 8.5 7.7 7.1 6.6 6.2
Value/Share = 7.0% 8.9 7.9 7.3 6.7 6.3
% expected return -37.5%
515.3
Horizon Value SensitivityHorizon Value (Constant Growth)
DCF Analysis
$6.6
2686.2
1618.9
34.3
1101.6
1103.6
3026.6
WACC
5.0%
Downside Case Valuation1 2 3 4 5 6 7
2002 2003 2004 2005 2006 2007 2008
EBIT 77.3 211.8 233.0 256.3 281.9 310.1 341.1
% growth NA 173.9% 10.0% 10.0% 10.0% 10.0% 10.0%
- Taxes (27.1) (74.1) (81.5) (89.7) (98.7) (108.5) (119.4)
+ D & A 99.2 103.5 112.6 144.6 157.8 172.3 188.3
+ Changes in Working Capital 147.8 (17.9) (37.5) (41.3) (45.4) (49.9) (54.9)
Operating Cash Flow 297.3 225.0 226.6 270.0 295.7 324.0 355.2
- Capital Expenditures (224.4) (145.5) (140.0) (132.0) (145.2) (159.7) (175.7)
Free Cash Flow 72.9 79.6 86.6 138.0 150.5 164.3 179.5
% growth NA 9.1% 8.8% 59.4% 9.1% 9.2% 9.2%
PV of FCF 63.1 59.6 56.2 77.5 73.2 69.2 65.4
PV (2002-2008)
growth rate Long-term Growth Rate 13.5% 14.5% 15.5% 16.5% 17.5%
Horizon Value (2009) 3.0% 5.5 5.3 5.1 4.9 4.7
PV (Horizon Value) 3.5% 5.6 5.3 5.1 4.9 4.8
4.0% 5.7 5.4 5.2 5.0 4.8
Present Value of Company = 4.5% 5.8 5.5 5.3 5.0 4.9
- Debt 5.0% 6.0 5.6 5.3 5.1 4.9
+ Cash 5.5% 6.1 5.7 5.4 5.2 5.0
Value of Equity = 6.0% 6.3 5.9 5.5 5.3 5.0
6.5% 6.5 6.0 5.6 5.3 5.1
Value/Share = 7.0% 6.7 6.2 5.8 5.4 5.2
% expected return -49.2%
464.4
Horizon Value SensitivityHorizon Value (Constant Growth)
DCF Analysis
$5.3
2186.0
1118.7
34.3
1101.6
654.3
1794.3
WACC
5.0%
Valuation
Base Case = $5.8– Assumes return to profitability in 2002
($0.19/share), strong growth in 2003 (183%), then 16%
Ideal Case = $6.6– Assumes ($0.21/share) in 2002, 200% growth in
2003, then 20% Downside Case = $5.3
– Assumes ($0.17/share) in 2002, 174% growth in 2003, then 10%
Base Case Sensitivity
Long-term Growth Rate 13.5% 14.5% 15.5% 16.5% 17.5%
3.0% 6.0 5.7 5.4 5.2 5.0
3.5% 6.1 5.8 5.5 5.3 5.1
4.0% 6.3 5.9 5.6 5.4 5.2
4.5% 6.4 6.0 5.7 5.4 5.2
5.0% 6.6 6.2 5.8 5.5 5.3
5.5% 6.8 6.3 5.9 5.6 5.3
6.0% 7.0 6.5 6.0 5.7 5.4
6.5% 7.3 6.6 6.2 5.8 5.5
7.0% 7.6 6.9 6.3 5.9 5.6
WACC
Recommendation
SELL current holding Justification
– Limited long term visibility – Changing industry dynamics (lower
growth/more competition)– Valuation