Monday - June 12, 2006

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We had a chance to catch up with our senior telecom analyst David Weissman, CFA to find out what was hot at the Globalcomm Convention, the largest conference for the telecom equipment industry. David returned yesterday from the trade show, and shared his impressions with us.

What has been your top-level industry view of telecom equipment spending this year, and has that changed following your review of the Globalcomm trade show?

As I mentioned in previous discussions, the overall market opportunity for telecom equipment remains neutral. I did not get any significant indicators that things are going to change much following the Globalcomm show. If anything, it was relatively slower than I expected. However, as I always believed, there continue to be select investment areas and companies that still could benefit, regardless of a neutral sector outlook.

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Zacks Equity Research continued...

Any statistics on what may be expected in terms of capital spending by telecom and cable companies?

There is a range of different analyses of what may be expected. In general, the capital expenditure trend has been slightly upward over the past year, as compared to the fall-off that occurred three or four years ago. Telecom carriers in the U.S., for instance, spent approximately $165.7 billion in 2005 on network and software equipment, according to the TIA (Telecommunication Industry Association). This represents approximately 5% growth from the previous year. The growth was primarily attributed to wireless network expenditures, which grew at nearly 23%.

Worldwide, the story is somewhat different. We are seeing stronger growth for infrastructure investments and spending in Asia, Eastern Europe, India and Latin America.

Although you have a neutral industry position for telecom equipment right now, you mentioned that there are certain areas of opportunity. Can you identify some of those niches?

Sure. It should be no surprise by now that carriers are promoting network convergence based on IP (Internet Protocol). What is meant by that is carriers are intending to add value by bundling services – such as wireless, Internet, landline voice and video – and developing other avenues of revenue with video content. For instance, when a wireless user is at home, several options are now available so that the cellular phone conversations can be transported over more economical home landlines as opposed to using wireless minutes. This is being enabled not only by the converged IP networks, but also by improved customer telephone customer premise capabilities.

At the show, we also received supportive indicators that IPTV remains a dominating theme among carriers as they intend to roll out their own video services, competing against cable companies. What was quite interesting is that the equipment companies are adding capabilities to advance the features beyond traditional offerings supported by the cable companies. Fiber in the access portion of the network was also widely publicized. We continue to recognize a variety of architectures, whether it is fiber all the way to the premise, as is intended with Verizon's (NYSE: VZ) FiOS or fiber-to-a-neighborhood demarcation as implemented by Bell South/AT&T (NYSE: T). Several equipment providers are expected to benefit from fiber access initiatives, including companies we cover – Tellabs (Nasdaq: TLAB) and ADC Telecom (Nasdaq: ADCT).

We also noted emerging approaches to improve wireless data transport, whether it was from the cellular networking perspective or from extended implementations of Wi-Fi, called WiMAX. Companies including Harris (NYSE: HRS), NEC and Ceragon Networks (Nasdaq: CRNT) are marketing improved backhaul solutions to connect cellular or WiMAX base stations by microwave radios at data rates well above 100 Mbps. In years past, wireless backhaul required less bandwidth as it was primarily voice-centric, but the emergence of content-rich wireless data over cellular and Wi-Fi networks has created the ongoing potential for backhaul bottlenecks.

In fact, the theme of Globalcomm's keynote speech, presented by Research In Motion’s (Nasdaq: RIMM) President and co-CEO Mike Lazaridis cautioned the wireless industry to prepare itself for bandwidth limits as frequency resources remain scarce and will impact the amount of use that is forecasted. This is surely going to also impact the backhaul that connects the wireless links.

To read the complete Analysts Interview, click: http://at.zacks.com/?id=2723.

David Weissman, CFA is a senior analyst covering the telecommunications industry for Zacks Equity Research.

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MORE FROM ZACKS EQUITY RESEARCH…

Analyst Blog - NEW!

Get real-time market insights from Zacks Equity Research Analysts. To see their latest posts, click here.

 
BULL OF THE DAY

Valero Energy Corp. (VLO) - Core Play on Refiners. For full Zacks research report, click here.

 
BEAR OF THE DAY

Onyx Pharmaceuticals (ONXX) - Oncology Drug Lacking. For full Zacks research report, click here.

 
ZACKS INDUSTRY OUTLOOK

Oil Machinery and Equipment in Demand

Half of the companies in Oil Field – Machinery & Equipment are Zacks #1 Ranks. More...

 
EARNINGS TRENDS

Earnings Still Strong

With all the recent volatility in the market, keep in mind that earnings are still looking very healthy for both this year and next. More...

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Zacks.com is proud to share with you some of the best trading strategies that truly allow you to Profit from the Pros. Today we highlight...
 

Profit Tracks: Growth and Income

This Profit Track looks for stocks that are paying dividend yields of greater than 8% along with other attractive fundamental attributes. Although this screen is based on a long-term and lower risk approach to investing, it has consistently beaten the S&P 500.

 
Here are four stocks that make the grade for the Growth and Income Profit Track:

Anthracite Capital, Inc. (AHR) declared a second quarter dividend of 29 cents per share in mid-May, an increase over the previous dividend of 28 cents. Prior to the dividend declaration, AHR reported first-quarter operating earnings of 32 cents per share, which was ahead of last year’s result. The company noted that each of the components of its commercial real estate strategy came together, resulting in strong earnings growth over the previous quarter. Anthracite Capital offers current dividend yield of 9.68%. Continue your research on AHR at : http://at.zacks.com/?id=2254.

Deerfield Triarc Capital Corp. (DFR) invests in real estate related securities and various alternative investments. The company recently announced first-quarter earnings of 37 cents per share, surpassing the consensus estimate by almost 9%. DFR stated that the success of its diversified strategy is exemplified by the growth of assets in the portfolio and the recent dividend increase. The company raised its dividend from 35 cents per share for the fourth quarter to 36 cents for the first quarter. DFR boasts a current yield of 11.08%. Continue your research on DFR at: http://at.zacks.com/?id=2255.

Iowa Telecommunications Services, Inc. (IWA) posted first-quarter earnings of 38 cents per share in early May. The result topped analysts’ expectations by nearly 3%. The telecommunications service provider mentioned that its performance for the first quarter was strong from every perspective. In mid-March, the company declared a quarterly dividend of $0.405 per share. IWA meets the criteria of this Profit Track with a current dividend yield of 9.06%. Continue your research on IWA at: http://at.zacks.com/?id=2256.

Seaspan Corp. (SSW) owns containerships and charters them pursuant to long-term fixed-rate charters. The company, which currently yields 8.10%, released its first-quarter report in mid-April. SSW said it began to execute on its growth strategy by expanding its fleet further through acquisition. Seaspan Corp. added that the acquisitions it announced this quarter diversify its customer base and the vessel size it can offer to customers, and the company anticipates they will add incremental cash flows for distribution to its shareholders once the new ships are delivered and operating. The first-quarter report included a dividend declaration of $0.425 per share. Continue your research on SSW at: http://at.zacks.com/?id=2257.

To see the full list of stocks that currently pass this winning screen, go to: http://at.zacks.com/?id=2258.

All the Profit Track strategies were created and backtested using the Research Wizard software from Zacks Investment Research. If you like this screening strategy, but want to narrow down the list of stocks and even improve the performance, then you should start a free trial to this powerful stock picking tool. Learn more about the Research Wizard free trial offer and our new special report “Top 10 Stock Screening Strategies” at: http://at.zacks.com/?id=2307

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SCREEN OF THE WEEK

Pulling Profits and Cutting Losses

Kevin Matras looks at how to use Price and Volume for locking in profits, cutting losses and spotting potential trend changes: http://at.zacks.com/?id=2259.
 

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Every day on Zacks.com we highlight four Zacks Rank Buy stocks. Each individual stock is chosen based on how well they match the criteria for the four main schools of investing: Aggressive Growth, Momentum, Growth & Income and Value.
 

Aggressive Growth – Callwave (CALL)

Callwave (CALL) has a limited earnings history, but it did post a 33% earnings surprise last quarter. CALL is still losing money, but the loss estimates have decreased significantly from 11 cents per share to six cents over the past 60 days. The company's initiatives into higher margin business segments should allow it to be profitable in the near future. Read the full analysis on CALL at: http://at.zacks.com/?id=2510.
 

Growth & Income – Group 1 Automotive, Inc. (GPI)

Group 1 Automotive, Inc. (GPI) exceeded analysts’ earnings expectations by an average margin of 29.2% over the past two quarters. Furthermore, the company upped its full-year 2006 earnings per share guidance in early May. The Board of Directors at GPI increased its cash dividend by 7.7% in late May. This Zacks #1 Rank stock is currently yielding 0.94%. Read the full analysis on GPI at : http://at.zacks.com/?id=2511.

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Zacks Rank continued...

Momentum – Dillard’s Inc. (DDS)

More good news to come for Dillard’s Inc. (DDS)? Retail stocks have all done well recently, buoyed by improving earnings and strong May sales, and Dillard’s is no exception. DDS is expected to report the April quarterly results soon (indeed, DDS was scheduled to report on Jun 6, but did not). Analysts’ consensus estimates call for EPS of 59 cents per share, up from 46 cents in the same period last year. For May, same store sales were up 3% to $534.3 million, while for the 17-week period ended May 27, sales were $2.37 billion, with same store sales up 2%. Read the full analysis on DDS at: http://at.zacks.com/?id=2512.
 

Value – The Timken Company (TKR)

The Timken Company (TKR), a Zacks #1 Rank stock, recently reported solid first-quarter results. The company upped its full-year earnings per share guidance back in mid-April. Analysts’ estimates have been on the rise for this year and next year. Earnings per share are expected to grow 11.7% over the next 3-5 years. TKR has a price-to-book ratio of 1.8 and a PEG ratio of 0.88. Read the full analysis on TKR at: http://at.zacks.com/?id=2513.
 

Zacks Rank Resources

• View All Zacks #1 Rank stocks: Go to: http://at.zacks.com/?id=2266.
   
• Free Zacks Rank Guide: Learn how to use the Zacks Rank to pick more profitable stocks. Get the guide: http://at.zacks.com/?id=2267.
   
• Zacks Advisor: Discover Ben Zacks' hand picked #1 Rank stocks on his Timely Buys list at: http://at.zacks.com/?id=2538.
   
• Zacks Options Trader: Combine the timeliness of Zacks #1 Rank stocks with the explosive profit potential of options. Learn more at: http://at.zacks.com/?id=2700.
   
• Zacks Wealth Management: Own all the Zacks #1 Ranked stocks in a portfolio managed by Zacks. Learn more at: http://at.zacks.com/?id=2539.

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Here we cast the spotlight on a timely Featured Expert commentary that recently appeared on Zacks.com.

 
Richard Moroney, Editor of Upside

History suggests that shares of steady growers outperform in good times and bad, and recent market volatility could further enhance the appeal of stocks supported by rock-solid fundamentals.

To that end, Richard Moroney and his team screened for companies with especially strong fundamentals. Factors particularly useful for identifying high-quality growers include:

• Sales and profit momentum. Stocks that made Moroney and his team’s screen had at least three consecutive years of revenue and per-share earnings growth. In addition, the companies are expected to post sales and profit growth in both 2006 and 2007.
   
• Solid cash-flow trends. Because profits can be misleading, evaluating a company’s cash flow can serve as a useful check on operating performance. Three straight years of cashflow increases were needed to make Moroney and his team’s screen.
   
• Book-value growth. A company’s ability to boost book value can shed light on the quality of its earnings. Again, Moroney and his team screened for three consecutive years of growth in per-share book value.
   
• High return on equity. ROE, net income divided by common equity, shows the return a company is generating on shareholders’ investments. Moroney and his team limited their screen to companies with a ROE above their industry group average.
   
• Attractive relative valuation. Consistent performers often trade at lofty valuations, but the market’s recent pullback has created better values. Moroney and his team screened for stocks with trailing and current-year P/E ratios below or in line with industry averages.

Reviewed in the following paragraphs are companies that passed Moroney and his team’s five-part screen. These companies seem capable of delivering steady growth over the next 18 to 24 months, and all stocks have attractive valuations.

Specialty retailer Men’s Wearhouse (MW) sells brand-name and private-label clothing and accessories. The company is benefiting from increased store traffic, improved tuxedo rentals, and higher profit margins. Potential acquisitions, new business initiatives, and expansion of the tuxedo business should help sustain near-term growth. In 2006, Men’s Wearhouse plans to open five retail dry-cleaning and laundry facilities in the Houston area. The company can use its generous cash flow to fund growth. Over the past 12 months, operating cash flow was $146 million, while free cash flow was $83 million. Men’s Wearhouse has nearly $5 per share in cash on its balance sheet.

Total revenue increased 6% to $435 million, while same-store sales rose 2.7% in the U.S. and 3.9% in Canada.

United PanAm Financial (UPFC) offers nonprime automobile loans through a network of 113 offices in 32 states. Nonprime borrowers typically cannot obtain financing from traditional lenders. United PanAm competes mostly with smaller, independent finance companies. Nearly all loans are for used cars, with an average term of 50 months and an average monthly payment of $291. Loan quality has improved in recent years, and purchased loan contracts have increased. United PanAm is expanding its footprint and growing its customer base to lessen dependence on a limited number of car dealers.

Over the last three years, revenue, per-share earnings, and cash flow have increased at least 24% annually. With strong sales and profit momentum, solid growth prospects and a reasonable valuation, United PanAm represents a top pick among specialty finance companies. The company faces a host of competition. In addition, higher interest rates could weigh on car sales and impact loan delinquencies.

 
About Richard Moroney’s Upside newsletter

Hello, I’m Richard Moroney, Editor of Upside and creator of the Quadrix Stock Rating System. In February 1999, I began using Quadrix to serve as a first screen to identify stocks with winning potential. Over the past few years, this system has proven to work significantly well with smaller stocks and has proceeded to gain 240.1% while the Russell 2000 Index gained only 36.3%.  http://at.zacks.com/?id=2537.

OTHER TOOLS FROM ZACKS

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At the heart of Zacks Investment Research is the Zacks Rank investment philosophy that continues to vastly outperform the market. Our Zacks #1 Ranked (Strong Buys) have produced the following results for investors:

• +33% average annual return since 1988 versus +11.9% for S&P 500
• Outperformed S&P 500 in 17 of the last 18 years
• +43.8% total return from 2000 to 2002 - the worst bear market in over 60 years.
• +18% in 2005

And just as importantly, the Zacks #5 Rank stocks (Strong Sell) List has alerted investors as to which stocks to dump from Their portfolios to avoid unnecessary losses.

To truly take advantage of the Zacks Rank, you need to first understand how it works. That's why we created the free special report: Zacks Rank Guide: Harnessing the Power of Earnings Estimate Revisions. Download a free copy now to prosper in the years to come by visiting: http://at.zacks.com/?id=2309.

Or view the full list of Zacks #1 Ranked stocks at: http://at.zacks.com/?id=2266.

FREE PORTFOLIO TRACKER

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• Broker Recommendation changes
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We hope you enjoyed this issue of "Profit from the Pros", And we look forward to visiting with you again next week.

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Regards and Happy Investing,

Charles Rotblut, CFA

Senior Market Analyst
Zacks.com

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