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Hey Modelman, would you buy this stock?
Once again, Markman tackles readers' probing questions. Has NII Holdings climbed too high? What about Redback? And readers sound off on satellite radio.
By Jon D. Markman
I promised to answer reader questions at least once a month. (For the last one, click here.) So here we go:
Hey Modelman, you listed NII Holdings (NIHD) as one of your Nasdaq All-Stars on April 9 ("Investors swing for the fences"). It was a typical situation where a firm re-emerges from bankruptcy and nobody wants to own it. At the beginning of the year it was just insanely cheap relative to comparable companies but at $25 in April there was no way I'd buy it. Now its at $36! I wouldn't expect it to do too much more for the rest of the year, would you?
Modelman: NII Holdings, the quasi-independent Latin American arm of Nextel Communications (NXTL, news, msgs), is a great example of two key vectors in the market today. First, from a business point of view, bankruptcy can help a troubled company eliminate its debts and lower its costs -- factors that give it a tremendous edge over competitors. Many of these are tigers when they return to public trading. Second, from a market point of view, traders today love story stocks with big upside earnings surprises and upgrades from well-regarded independent stock analysts. Many jump the first day after news and keep rising.
NII, which provides Nextel mobile phone service in Mexico, Brazil, Argentina and Peru, was already buzzing along on April 9 with a 109% year-to-date advance when my screen for low-priced momentum stocks identified it as a stock with further potential. Three weeks later, the company announced blowout earnings -- exceeding analysts expectations by a whopping 50 cents a share and recording $12 million in free cash flow in a quarter in which it was expected to report more than $20 million in cash burn.
The stock moved up on that news, and then it climbed another $4.60 on the day that Fulcrum Global Partners, one of the new-age stock-research firms not affiliated with investment bankers, slapped a "buy" rating on the stock and a $44 a share 12-month price target. The target price is based on the stock trading at 4.8 times 2004 earnings before interest, taxes, depreciation and amortization estimates, or 14.9 times its 2004 earnings-per-share estimates. That represents a 20% discount to comparable international wireless companies and a 25% discount to domestic wireless companies.
Fulcrum noted that risks to the target price -- besides obvious obstacles like currency and global economic volatility -- include the potential for a dilutive secondary stock offering. Considering that insiders dumped 163,300 shares of the stock worth $6 million from May 19 to May 23 at prices from $31.50 to $36, its probably time to look for a pullback in the shares. But with money flow still strong and momentum continuing, in a speculative environment there appears to be room for further advancement in this high-wire act. For the All-Stars screen, click here.
Redback's up; what's up?
Hey Modelman, what are your thoughts on Redback Networks (RBAK, news, msgs)? It went up about 50% in one day last week.
Modelman: Redback and all the other little digital subscriber line and optical equipment stocks such as Corvis (CORV, news, msgs), Avanex (AVNX, news, msgs) and New Focus (NUFO, news, msgs) are in play again. In a story-stock environment, almost any group of badly beaten-down names will have its moment in the sun -- and sometimes more than a moment. The recent swoosh in these stocks came after Avanex announced it would acquire the optical components business of Alcatel (ALA, news, msgs) and Corning (GLW, news, msgs). That was good for about a 175% move in Avanex shares on May 13, and reignited traders' memories of 1999 and 2000, when these stocks regularly zoomed 10% to 30% in a day. At one point in the 2000, priced at $273 per share, Avanex had a market capitalization higher than General Motors (GM, news, msgs); Redback traded as high as $180.
When sentiment changed, Avanex shares fell as low as 63 cents last October and were still trading around 85 cents in April; for Redback, the low was 26 cents in October and 65 cents in April. But perceptions change fast these days, and a share of Avanex will now cost you $4.15 while a Redback share is still just $1.11. All these stocks are wildly overvalued in relation to their business prospects at this level, but if history provides any lesson, its that trading momentum has a life of its own. You dont want to be left without a chair when the game of musical chairs ends, but if you want to speculate and promise to sell when the tide starts shifting the other way again, go ahead and take a flier on Avanex, Redback, Corvis and other similar names such as Bookham Technology (BKHM) and Vitesse Semiconductor (VTSS).
Look at satellite radio's supplier
Hey Modelman, in your column on Sirius Satellite Radio (SIRI, news, msgs) and XM Satellite Radio (XMSR, news, msgs), "Reality catches up with satellite radio hype," you state you don't think there's any money to be made in the hardware for this new hot market. I respectfully disagree. May I suggest you take a look at the only supplier to service both camps, namely Audiovox (VOXXE). When it clears its Nasdaq reporting issues, I think you'll see . . . its upside potential in this market.
Modelman: Good call. Sirius is up 53% since my column ran, while Audiovox is up 45%, including a 19% move on Friday alone. Audiovox, the distributor of inexpensive cellular handsets and car radios, has been a darling of many deep-value investors, such as Kahn Brothers in New York, for the past couple of years. Even after the past few days run, the company still sports an extremely low price-to-book ratio of 0.69 and a price-to-sales ratio of 0.20 on annual sales in excess of $1.1 billion.
A key reason for the companys slump was concern over federal securities regulators questions about its accounting methods. Last week, the company announced it would restate earnings for 2000 through 2002 and actually book $1 million more in profits than it had previously. With the SEC overhang out of the way, Audiovox shares can start to participate in the small-cap rally.
Besides its role as a fast-twitch deployer of cellular technology, Audiovox has become one of the leading deployers of low-cost radios for the satellite radio rollout. Thomas Kahn, whose firm is the largest institutional owner, told me Monday he believes the shares can double over the next three years not just because of its role in the satellite radio food chain but also because the cellular-phone replacement cycle is about to shift into high gear. Read on for a few more comments about satellite radio.
Let's talk more about satellite radio
Hey Modelman, nice article on the satellite radio stocks, but there were some errors and omissions. Only Sirius charges $12.95 per month. XM subscriptions are $9.99. Sirius is commercial-free on 60 music channels, but has commercials on its 40 news, talk and sports channels. XM is commercial-free on 36 of its 70 music channels, with limited commercials on the rest. But what you really missed is the programming.
Modelman: The reason that XM has achieved a faster adoption growth rate than cable TV, DVDs, CDs and all other electronic entertainment devices in history is the terrific content. Terrestrial radio stations try to reach the widest possible number of listeners to drive ratings. As such, the formats are bland and play the same music over and over. And they play up to 20 minutes of commercial per hour. A man named Lee Abrams, who is a programming legend, rules XM's programming. The passion is back. It is impossible to listen to XM for more than an hour without falling in love with it. The proof is in the attrition rates: There are none. Something like 99% of people who get XM keep it, and get other people in their cars to listen to it.
Hey Modelman, we are in the dark ages of commercial radio. Radio properties in major markets sell in the range of $150 million. The commercial load needed to pay off this investment makes for bad radio, with seemingly endless waves of commercials. Standard radio programming itself is poor, as evidenced by the documented drop in listeners. The opportunity for satellite radio is tremendous. As a radio veteran in Chicago and a subscriber to XM, I can tell you the quality and variety offered by XM is superb and will catch on.
Hey Modelman, why havent satellite TV operators jumped into satellite radio service? Because it has a high probability of failure. Nobody listens to the radio channels on their TV dishes. Anybody can do the math for XMs and Sirius income statements and see that to pay the current debt and future debt and then the convertibles in the future they need more subscribers than they could ever get. . . . I am shocked at you: This will be bad for your readers in the long run.
Hey Modelman, I purchased Sirius last summer for my van and we have XM in my husbands car and in the house. I am not a super music fan and had doubts about the monthly cost. But after less than a month of listening, I would never own a car without satellite radio. The music streams have evolved and now have great mixes and smooth transitions. As a listener of both sat radio companies for over a year, I have to say that Sirius has better programming and no commercials on their music stations. There is a problem, however, that no one talks about: When we're driving, my husband "channel surfs"! As we all know, this is extremely annoying in the living room with cable TV, and now he can do it in the car, too!
Modelman: When was the last time you heard people so excited about a technology that they wanted to proselytize it? It reminds me of the early days of DVD or the Internet or, more recently, wi-fi networking. And coincidentally, there's one major semiconductor supplier that feeds key products to both wi-fi and satellite radio makers: Agere Systems (AGR.A). It makes a second-generation chipset for Sirius that dynamically combines signals broadcast from ground antennas and three satellites to provide powerful reception capabilities. Because Agere also is a leading supplier of wi-fi components, it was careful to ensure that sat-radio devices didn't conflict with wireless data signals.
Agere was spun off from Lucent Technologies (LU, news, msgs) in June 2001, and traded briefly in the $9 range before sinking to around 50 cents last October. The stock is up 325% from then, to around $2.40, which is a lot better than even the powerful 50% bounce in that period in the Philadelphia Semiconductor Sector Index ($SOX.X). Agere has struggled to obtain profitability as its revenue has weakened, but if you believe the economy is shaping up, then its dominance in two growing technology trends should restore its balance. Agere is probably relatively undervalued and could well get back to the $3.50 to $6 range in the next year from its current perch around $2.44.
Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at supersupermodels@jonmark.com. At the time of publication, his fund was not long or short any stocks mentioned in this column, but positions can change at any time.
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