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The offer:

CommScope (COMM) is offering 30,769,230 shares of its common stock in the price range of $18.00 and $21.00 per share. The expected listing date is October 25, 2013, on NASDAQ. (Source: IPO prospectus)

Business Overview:

The company provides solutions for wireless, business enterprise and residential broadband networks that allow its customers to deliver high-bandwidth data, video and voice applications. It serves its customers through a team of approximately 12,500 people in over 100 countries. Its customers include the leading global wireless operators, enterprise customers and MSOs (broadband).

Financials:

$ in million

FY 2012 (12 months)

H1 FY 2013 (6 months)

Net sales

3,326.00

1,749.30

Operating costs and expenses:

Cost of sales

2,264.90

1,149.50

Selling, general and administrative

471.1

236

Research and development

127

65.8

Amortization of purchased intangibles

176.9

87.6

Asset impairment

40.9

11.5

Restructuring costs

23

34.5

Total operating costs and expenses

3,103.80

1,584.90

Operating income

222.2

164.4

Other income (expense), net

-15.4

-5.3

Interest expense

-189

-93.8

Interest income

3.4

1.6

Income (loss) before income taxes

21.2

66.9

Income tax benefit (expense)

-26.2

-53.4

Net income (loss)

-5

13.5

Addressable market:

Due to the proliferation of new-age technologies such as Big Data, cloud-based services, machine-to-machine communication as well as the increased adoption of mobile devices such as smartphones, tablets, etc. for business and entertainment purposes like steaming media content, the demand for bandwidth, particularly for wireless bandwidth, has been rising at a rapid pace the last few years.

To meet the ever growing demand for the bandwidth, service providers and data-centers all around the world are investing in the up-gradation of the existing communication infrastructure by the deployment of the technologies that support high data-transfer speed like LTE technology. LTE technology is the most advanced technology currently being deployed to support the high data transfer speed. This deployment of the new infrastructure as well as the replacement of the old infrastructure is the main source of the demand for the company's products. Listed below are some industry estimates about the amount of money that shall be spent on the deployment of the new infrastructure along with the expected growth rate:

"A June 2013 Gartner, Inc. report estimates that next-generation LTE mobile infrastructure spending was $5.9 billion in 2012 and is forecasted to reach $28.4 billion by 2016, a CAGR of 48%."

"In 2013, Gartner, Inc. reported that spending on enterprise and large data centers is estimated to grow from $64 billion in 2012 to $85 billion in 2016, representing a CAGR of 7%."

Key points:

Key positives:

  1. Industry leader.
  2. Global manufacturing and sales infrastructure.
  3. Integrated offerings.
  4. Strong focus on R&D.
  5. Customer relationships.
  6. Huge addressable market.

1. Industry leader:

The company primarily serves three segments: wireless operators, enterprise customers and MSOs (broadband). It holds the leading position in all these segments (see the table below).

(click to enlarge)

This leading position tells a lot about its product quality, global reach and its customer relationships.

2. Global manufacturing and sales infrastructure:

The company supplies its products all over the world through its world class, strategically located, manufacturing and distribution facilities. It serves its customers through a team of approximately 12,500 people including a 600-person direct sales force in over 100 countries. The company utilizes lower-cost geographies such as China, Mexico, India and the Czech Republic for high labor content products and largely automated plants in higher-cost regions.

The global footprint and cost effective manufacturing base makes sure the company stayS competitive in an intensely competitive market.

3. Integrated offerings:

The company offers complete solutions for the segments in which it operates. It believes that it is the only supplier that provides a complete portfolio of integrated RF solutions. This complete portfolio of solutions gives it a significant competitive advantage and makes it a preferred supplier for turnkey projects.

4. Strong focus on R&D:

The company possesses strong R&D capabilities. It holds approximately 2,700 patents and patent applications. This proprietary IP along with its deep engineering expertise allows it to develop industry leading solutions that keep the company ahead of its competitors.

5. Customer relationships:

The company holds strong customer relationships. Its customers include leading global wireless operators, thousands of enterprise customers, and MSOs (broadband). Major customers and distributors include companies such as AT&T (T), Verizon (VZ), Ericsson, Alcatel-Lucent (ALU), T-Mobile (TMUS), etc.

6. Huge addressable market (explained above).

Key negatives:

  1. Competitive industry.
  2. Normal business risks.

1. Competitive industry:

The market for the company's products is highly competitive. Its prominent competitors include Belden, Comba Telecom, Corning (GLW), Huawei, etc.

2. Normal business risks:

Normal business risks like emergence of the new competitors with better product/service offerings, any adverse change in Govt. regulations, any economic slowdown, etc.

Valuations:

At $19.5 (mid range of offer price) the company's valuation stands at $3.6 billion.

At $19.5, the company is available at a P/S of below 1x ("TTM") and P/E of over 100x ("TTM").

Conclusion:

The company operates in the competitive and dynamic market where product innovation and pricing play a very vital role. Its focus on R&D and its leading position in many of the key segments tells a lot about its product quality and customer relationships. For future growth, the company mainly depends on the pace of deployment of new communication infrastructure. Financially the company may show an improvement in the future due to better margins and low interest costs along with muted revenue growth. Though any big acquisition may bring in revenue growth, but any such acquisition will put the further strain on the balance sheet which already shows a debt of over $3 billion.

I am of the view that the company as well as the industry lacks any long term visibility about future growth. At current valuations, the company is fully priced.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must read offer prospectus and consult its financial adviser before making any decision.

Source: CommScope: Operating In A Competitive And Dynamic Market