Hold Small-Cap Westell for Now

We maintain our Hold recommendation and the same valuation target for Westell Technologies (WSTL - Analyst Report), a leading provider of broadband access products and conferencing services, following the mixed financial results for third quarter (ended December) fiscal 2008. While revenue declined as a result of transitioning a major contract with AT&T, Inc. (T - Analyst Report) -- formerly the BellSouth territory -- EPS was above our expectation due to ongoing outsourcing and restructuring activities.

Consequently, gross margin returned to a slightly higher level. Although the company's financial outlook for the fourth quarter remains flat with the prior reporting period, we do believe that the situation may improve in early fiscal 2009 as Westell received two major contracts from AT&T, Inc. and Verizon Communications (VZ - Analyst Report).

Announcement of further headcount reduction and the decision to explore strategic alternatives for its conference services unit may also lead to improved financial prospects in future reporting periods. Westell is currently trading at 41.2x our estimated fiscal 2009 earnings.

This is at a significant premium over the S&P 500 average, but at a discount to the peer group average. With respect to other selected valuation metrics, the stock is also trading below its peers. Our assessment indicates that earnings volatility will remain, at least over the near-term, but we forecast financials to improve in mid-fiscal 2009 as the company harnesses revenue from its major contracts with AT&T and Verizon.

Restructuring will also further reduce operating costs in this same time frame. We maintain our Hold rating and reduce our six-month price target to $2.25, based on a 1x to our fiscal 2009 enterprise value/sales estimates, closer to the peer benchmark.

Nalak Das contributed to this report.

Read the full analyst report on WSTL.

Read the full analyst report on T.

Read the full analyst report on VZ.