Thursday, November 15, 2012

Tech Deep Values Part I: Sycamore Networks (SCMR)

Sycamore Networks Inc (SCMR)- Growth in an Asset Value Play
Sycamore develops and markets optical networking products for telecommunications service providers worldwide. They make intelligent bandwidth management products, optical switches, multiservice cross-connects, access platforms, and access gateways.

At a market cap of $1.14 Billion or $4.05 per share the stock is almost selling for its net current assets of $903.85 Mil. Net current assets is calculated by taking current assets and subtracting all liabilities. What is so special about this form of valuation you ask? These current assets are the most liquid(easily converted to cash) and are a rough liquidation value. Typically, companies in financial distress or that have very weak prospects trade below this level. They mostly aren't companies like Sycamore that is piling cash and has total assets of just over $1 billion and total liabilities of only $60 million. They also just have $1.6 million in long-term debt. This company isn't seeing financial trouble any time soon.

Revenue growth has been really good growing 78% for the year ending July 2007. Sprint Corporation and Vodafone Group PLC account for 53% and 16% of revenue. They have generated some nice free cash with $18 mil in free cash flow last fiscal and $19 million in 2006, an improvement from the red. Their balance sheet is flush with cash! They have cash and cash equivalents of $924.8 million as of July 31, 2007.

Last fiscal years loss was related to their acquisition of Eastern Research which they paid in all cash for $80 million. This should be a temporary not future set-back as earnings are expected to come in at $.15 a share this year and $.18 next year putting the stock at a forward PE multiple of 22. They are expected to grow at 15% a year going forward. The purchase of Eastern Research will allow them to diversify, increase revenue and grow their customer base.

Companies this solid with discounts to asset values don't come around to often. This company is worth picking up and adding to a diversified portfolio below its net current asset value of $3.22 per share.

full disclosure: no position in Sycamore Networks Inc. (SCMR) at the time of this writing.

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