On December 10, The Wall Street Transcript interviewed Lawrence M. Harris, an Oppenheimer & Co. analyst responsible for the telecommunications equipment sector. Key excerpts, including his sector picks and nix, follow:
TWST: Where are you pointing investors at this point?
Mr. Harris: There are a number of stocks that we have currently recommended. For example, in the large cap arena, we certainly like Nokia (NOK). It has had a very good run thus far this year and certainly here on any kind of a pullback we would be adding to positions. They are the leading player in the emerging market. They were one of the first to recognize that we are not dealing with a homogeneous mobile device market. They correctly determined they needed separate divisions to focus on entry-level to mid-level devices, including devices that were sold to higher income consumers in the US and Europe and other divisions that would be focusing on enterprise applications and multimedia applications. Multimedia phones generally are 3G and include megapixel cameras, music players, video playback and the like. Nokia is expected to show good growth. I think over time they will be adding to their services capability and they are already doing so in the area of music. I would expect them to expand their participation in the map area over the next couple of years or so.
Another company that we are recommending in the large cap arena is Motorola (MOT). It's a value story at this point in time and it is a turnaround story. They did suffer through some issues in the earlier part of 2007, but we believe they are beginning to turn around their operation. While their handset portfolio has some holes right now for the holiday selling season of 2007, we anticipate that we will see additional products from them in 2008 including a number of touch screen models, a number of them in the multimedia category and some of which will be targeted toward enterprise users. We will see over time (it won't all be in the first quarter) a number of new multimedia devices. The other aspect about Motorola is that the company's new CFO, Tom Meredith, has placed a significant emphasis upon cash flow generation. Look at what the potential free cash flow generation will be in 2008 and beyond and what that could mean in terms of a more accelerated share buyback program, increased dividend, debt repayment and the like.
In the mid-cap area one stock that we have been focusing on is Harris (HRS). It may not fit every theme here, but it is an interesting play on commercial and defense applications. The company is the largest supplier of radios for the military. Just the way we've seen mobile devices on the consumer side have Internet access capability, that's also happening on the military side where the radios that are being sold to the military operate on a variety of bands and have the capability of operating at Ethernet type speeds, in some cases. As I said, Harris is the largest supplier of such radios to the US military and, increasingly, international customers. The company also is the largest supplier of broadcasting equipment and as the deadline for the cessation of analog broadcast (February 2009) approaches, I would suspect that we will see increased demand for their broadcasting equipment. That does help the local stations and the networks move toward the HDTV.
In the small cap arena, one of the stocks that we currently like is Alvarion (ALVR), it's a pure play WiMAX company. The stock does tend to be somewhat volatile as the prospects, at least the perceived prospects of WiMAX among investors change. I think the reality is that the WiMAX market is going to be experiencing fairly significant growth over the next few years. The total WiMAX infrastructure equipment market was only about $150 million in 2006. It will probably grow over 50% this year, 2007, with still a very high double-digit growth rate. In 2012, it could be as large as $9 billion. By 2012 carriers not only in the US, but also in emerging markets where fixed Internet access is either not available or not reliable will begin to deploy these 4G networks. Alvarion traditionally has been the largest supplier of WiMAX equipment. Now you see other vendors entering the space, including large players, such as Motorola, Nokia, Alcatel-Lucent (ALU) and Samsung. I think the market will grow sufficiently over the next few years. There will be room for other players. There will be a number of smaller contracts that will be awarded in emerging markets that will be uneconomic for some of the larger OEMs to bid on. Alvarion is a small cap stock that is a pure play WiMAX firm.
TWST: Are there any names in this space to worry about that are losing position or going in the wrong direction?
Mr. Harris: There is one company that is perhaps less favorably positioned. It's a company called UTStarcom (UTSI). They are the largest supplier of handsets in China using a technology called PAS, personal access system. PAS is a technology that's not quite as sophisticated as the cellular technology that we have in the US. It did prove to be advantageous in China at the end of the last decade and certainly the first half of this decade, as there was a certain number of consumers who cannot afford traditional mobile devices and for them PAS was the solution. The typical service plan was only about $7 per month. The typical cost of a handset before any subsidies or types of adjustments was about $50 or $60. What has happened is that as the Chinese economy has grown, as consumer income levels have begun to increase, the Chinese consumers are moving away from PAS networks to more traditional cellular networks operated by China Mobile (CHL) and China Unicom (CHU). As a result, UTStarcom has seen a decline in their sales of PAS infrastructure equipment and also PAS handsets. It may take them a few quarters to get over this transition.