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Darth Vader: Coming to a Phone Line Near You Soon
By Michael Brush
May 19, 2005
To survive vanishing phone service margins, telecom companies from Verizon
Communications (VZ) to smaller regional competitors are moving into the
entertainment business – hoping to pipe movies into your living room instead
of the cable companies one day.
The ultimate goal is the so-called “triple play” menu – an offering of
television over broadband, voice over Internet protocol (VoIP) and high
speed Internet access.
To pull this off, telecom companies face the huge task of upgrading their
copper wire access to your home into a system that can carry digital
traffic. That means packets of digital information that are broken down into
small pieces and reassembled at the other end to deliver content.
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The effort calls for the installation of lots of specialized equipment to
upgrade the copper wires. Phone companies are also laying down fiber optic
cables to broaden the pipe. That’s why this tech trend carries the moniker
FTTP, for “fiber to the premise.”
The big telecom companies are still a long way from bringing you Desperate
Housewives or Star Wars: Episode III Revenge of the Sith. But recent
conference calls this earnings season confirmed phone companies are already
unleashing the billions of dollars of spending to get the job done.
Who wins
There’s little doubt this could help many of the once high-flying names from
the tech bubble, like JDS Uniphase (JDSU), Ciena (CIEN), Harmonic (HLIT),
MRV Communications (MRVC), and Bookham (BKHM).
Another way to play this theme is the so-called ditch diggers that install
cables and gear: Dycom Industries (DY), Mastec (MTZ) and Quanta Services (PWR).
But one thing sets these obvious FTTP plays apart. Except for Dycom, they
don’t show much in the way of an insider bet on what otherwise looks like a
very promising trend.
For the insider action, you have to turn to Zhone Technologies (ZHNE),
another small equipment maker. While one insider at Dycom nibbled on a
paltry $119,000 worth of shares in March, Zhone insiders have wolfed down a
jaw-dropping $16.4 million worth of stock in the $1.98 to $2.45 range since
March 10, according to Thomson Financial. That followed a multi-million
dollar round of buying at similar prices last summer and fall.
Now that’s conviction.
In the zone
What’s all the fuss about? Zhone offers equipment like line concentrators
and optical access platforms that help telecom providers convert from
circuit-based networks to packet-based delivery systems. The company also
sells gear used in optical networks. And it has a box that concentrates all
the residential connections outside the house – making connections easier
for the phone company.
Zhone recently struck three deals with: VALOR Telecom, a phone company
serving Texas, Oklahoma, New Mexico and Arkansas; the Iowa-based Stratford
Mutual Telephone Company; and a radio company based in Czechoslovakia. Ok,
so these aren’t the Verizons of the world. Big players like Verizon tend to
be locked in with the large equipment providers like Alcatel (ALA).
But there are plenty of smaller, independent phone companies left to sell to
– in the US and abroad – and that’s where Zhone’s growth should come from,
says David Markowitz, the vice president of marketing at Zhone. Legg Mason
analyst Timm Bechter says sales should grow 26% this year. He expects Zhone
to turn profitable in 2006, earning eight cents a share.
The bottom line: This is a tiny, little-noticed FTTP equipment player that’s
already beginning to catch part of the huge FTTP wave. It’s also a company
where insiders are buying hand over fist, suggesting you should too -- as a
way to get in early on the FTTP trend. That said, the market’s recent love
affair with tech could easily peter out temporarily before it finds its
footing again, providing the opportunity to get into Zhone a little cheaper.
So it probably won’t hurt to buy part of your position now and then wait to
buy shares where insiders recently bought, or somewhere below $2.45.
At the time of publication, Michael Brush owned shares of Zhone Technology.
Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner: http://www.investorideas.com/insiderscorner/.
InvestorIdeas.com Disclaimer:
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InvestorIdeas is not affiliated or compensated by the companies mentioned in
this article.
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