Who pulled the plug on Powerwave Technologies Inc.?
In early spring, the Santa Ana maker of gear for wireless phone networks was one of the hotter stocks in Orange County, reaching multiyear highs and claiming a slice of fame on Wall Street.
Powerwave did so without any real sexy products or even a publicity office.
Now the company is getting more questions than kudos. The stock recently touched its lows for the past 12 months and is off 40% since March. Powerwave’s market value was $1 billion last week, down from $1.6 billion four months ago.
Factors include a miserable first quarter, concerns about Powerwave’s place in a consolidating industry and prospects for growth.
Even a generally favorable acquisition,buying the wireless gear unit of Britain’s Filtronics PLC unit,has failed to get investors back on board.
“The growth rate’s been slowing, and that’s been a concern,” said Bill Choi, an analyst with Jefferies & Co. in New York.
Powerwave could just be in a rough patch. Powerwave has done a handful of acquisitions in past years to corner key segments. The company could get back in Wall Street’s good graces by meeting estimates for the remainder of the year.
Part of the company’s slump on Wall Street can be chalked up to the larger market downturn, which hasn’t been kind to technology stocks. Nasdaq is off about 10% this year, despite a good start in 2006.
“Since May on, you’ve had this just negative move in the market away from higher risk stocks,” said Jeffrey Harrison, portfolio manager for Evergreen Investments, a Powerwave investor.
Consolidation
Another concern for Powerwave: last month’s news that Germany’s Siemens AG and Finland’s Nokia Corp. are combining their wireless network gear businesses in a deal valued at $30 billion.
Siemens and Nokia are some of Powerwave’s biggest buyers, stirring up concerns a combined company could squeeze profits out of Powerwave.
“Once you have one customer close to 25% of your revenue, they’re definitely going to be able to push for lower prices,” Choi said.
The other concern: Siemens and Nokia might want to shift some of their contracts from Powerwave to diversify their suppliers.
Powerwave is upbeat.
“We still see a lot of demand,” Chief Executive Ron Buscher said during the company’s most recent conference call. “We believe the outlook for this year and next year is very strong.”
Powerwave sells amplifiers and other gear that boosts the capacity of wireless networks. Next generation “3G” networks, which allow phone users to watch video and listen to music, are driving growth for Powerwave.
The company sells to wireless carriers, such as Atlanta-based Cingular Wireless LLC, and to big gear makers such as Nokia and Siemens.
Boom, Bust
Powerwave had been on a good run. After a three-year slump, the company’s stock began climbing in the spring of 2005 and had doubled by last March as the company beat earnings estimates and grew profits.
Then came early April, when Powerwave surprised Wall Street. The company drastically lowered its first-quarter sales outlook.
The news wiped away $200 million in market value in one day.
Cingular, which makes up more than 10% of Powerwave’s sales, delivered much of the blow.
“I think that caught Powerwave off guard,” Evergreen’s Harrison said.
Cingular helped Powerwave beat estimates at the end of 2005 and then pulled back on its spending in the first quarter.
The surprise sent a message to investors: Powerwave’s revenue is at the whim of its largest customers.
Awaiting Q2
Still, Powerwave officials haven’t changed their sales guidance for 2006, saying the first quarter’s shortfall would be made up in the remaining quarters.
“There’s really some concern until the company delivers the report,” Harrison said.
Concerns persist about growth prospects for the industry, according to Choi of Jefferies.
The wireless gear market is expected to grow by about 4% this year, down from 7% last year,not exactly huge numbers.
“Demand is a little bit slower than where we’d like to have it,” Choi said. “The first half of this year has been down. We’re anticipating some pickup.”
There could be better growth within Powerwave’s niche,amplifiers and other add-on gear. Sales of those could grow about 10% annually for the next three years, according to Harrison.
Second-quarter results due in coming weeks will be telling.
“People want to see the business come back strongly,” Harrison said.
Filtronic Buy
The Filtronic acquisition could help. Powerwave gains about $340 million in yearly revenue with the deal, bringing the company to an estimated $1.4 billion in 2007, up from a projected $1 billion this year.
Filtronic could boost earnings by more than 20% next year.
Powerwave expects to save $10 million a year in manufacturing, research and development and other costs after Filtronic is integrated.
The company has used its acquisitions to emerge as a top player in many of its segments and has grown market share, according to Harrison.
Powerwave has been able to get better prices from customers, reversing the price war of a few years ago.
Profit margins were at 26% in 2005, up from the low teens back in 2003, Harrison said.
“The long-term is still attractive,” he said.
