Foundry Networks: A Different Way to Invest in High Tech

Jul. 6.07 | About: Foundry Networks, (FDRY)

Foundry Networks (FDRY) casts better connections. Businesses, schools, government agencies, and communications service providers use the company's high-performance switches and routers (including Layer 2, Layer 3, and Layer 4-7 equipment) to build local-, metro-, and wide-area networks. Its wireless networking products include access points and controllers. Foundry also provides network management software and product support services. The company, which outsources its manufacturing to companies including Celestica and Sanmina-SCI, sells directly and through resellers worldwide.

Here's a company sitting on $711 million in cash. With 147.55 million shares outstanding, that's $4.82 cents a share of cash. That stock sells for $17.00 so you're paying $12.18 for the company that has earnings expected to be 55 cents a share this year and 65 cents a share next year. Last year, it reported 31 cents a share. There's a trend here.

The same upward trajectory applies to sales. In 2006 they were $473.3 million. This year analysts predict $550 million and next year $625 million. Over the next 5 years, on average, expectations are for 10.5% a year growth in revenues and 10.5% a year increase in earnings. Not too much to get excited about, but a big improvement over the last 5 years when sales grew by 5.5% a year and earnings improved by 5% a year, on average.

The first quarter data showed sales of $135.8 million, up from $114 million last year's first three months. That's a new record for FDRY. New products are the main reason, especially in the enterprise chassis group, known as the Super X. Sales of these products doubled from last year. Investments were also made to support sales and push for new markets. With the hiring of more sales people, the rewards should be noticeable in higher revenues.

That's part of what management is doing with all the cash. Some other options: acquisitions, initiate a dividend, or do a stock buy back. No word as to what will happen but look for any or all of these.

One of the retardants for the stock price lately has been the company's late filing of restated financials with the Securities and Exchange Commission. It delayed filing because it was investigating historical transactions associated with stock-based compensation expenses. The review is done, and filings have been filed. Foundry is one of at least 218 companies to disclose government or internal probes into its stock options practices, according to Associated Press. This late filing put the company at odds with the listing requirements of the NASDAQ. As of June 26, it regained compliance.

Other numbers on FDRY: Net profit margin is predicted to be 15.5% this year, up from 9.7% last year. Look for 16% next year. Officers and directors own about 11% of the stock. Institutions have beeen net buyers over the last 3 quarters by a small margin. This is a mid cap company with a value of $2.5 billion. Current assets outnumber current liabilities by more than 7 to 1.

Check out FDRY if you're looking at a little different way to be in high tech. While there's lots of good going for the company, it's past price history has been volatile, going from a low of $4.10 in 2002, then hitting $33.80 in 2004, dropping to $7.90 in 2005, running to $18.30 in the first part of 2006 only to lose ground to $9 by the middle of the year. Since then, the stock has almost doubled. Put on your seatbelt if you're going to own this one.

FDRY 1-yr chart


Disclosure: none