Tuesday, August 19, 1997

Inter-Tel Inc.
(Nasdaq: INTL)
Phone: 602-961-9000
http://www.inter-tel.com/index.html
Price (8/18/97): $27 3/8

HOW DID IT DOUBLE?

Inter-Tel was reeling from a series of earnings reports falling short of expectations when in late April, the stock started its ascent. After an estimate-beating earnings report in late July, the stock has doubled.

But what made the stock move? There were a couple of favorable press releases about cooperation with Brooks Fiber and Nippon Telephone and Telegraph; however, there was no earth shattering news.

A quick glance at today's Investor's Business Daily shows me that telecommunications services and equipment are ranked in the top 25 sectors and have improved significantly over the past 6 months. At the nadir in stock price the YPEG valuation was $36. The price/sales ratio was a mere 0.73 and the PE was around 13, pretty inexpensive given the growth potential of the company. In a hot sector, past sins are forgotten -- and investors looking at analysts' expectations hopped on board.

BUSINESS DESCRIPTION

Inter-Tel produces telephones and voice processing systems (e.g. voice mail) and sells them to businesses. Products include switches, phones, long-distance service, and phone systems for offices. In addition, the company is an active participant in the development of Internet telephony. The company's AXXESS digital telephone software integrates computer networks and the telephone system. This allows users to conference, distribute calls, and interact with the computer system itself. Inter-Tel has just about anything a business would want in a phone system.

However, Inter-Tel is not alone. Competitors abound and include such formidable names as Lucent Technologies, the Baby Bells, Panasonic, and Mitel. This is a highly competitive business.

FINANCIAL FACTS

Income Statement
12-month sales: $205 million
12-month income: $9.5 million*
12-month EPS: $0.71*
Profit Margin: 4.6%
Market Cap: $359.5 million
(*Includes a special charge)

Balance Sheet
Cash: $25.7 million
Current Assets: $90.8 million
Current Liabilities: $26.1 million
Long-term Debt: N/A

Ratios
Price-to-earnings: 38.6
Price-to-sales: 1.8

HOW COULD YOU HAVE FOUND THIS DOUBLE?

An investor rooting around for value in the telecommunications area may well have stumbled across Inter-Tel. As stated previously, based on analyst's expectations the stock looked woefully undervalued at $11 per share. The problem the investor faced at that point was that the look through the rearview mirror was nowhere near as rosy. These same analysts had swung and missed for the prior three quarters. In fact, they missed by more than 10%.

There was some help on the Inter-Tel message board, where several satisfied customers reported pleasant experiences with Inter-Tel systems. An investor could have been cheered by those comments. When all is said and done, there is no way a reasonable investor could have anticipated a doubling in price in such short order.

WHERE TO FROM HERE?

In the recent quarter, Inter-Tel beat estimates by a penny, a nice turnaround from the previous disappointments. Analysts are looking for $1.46 per share for the coming fiscal year and long-term growth is estimated at 23%. The PEG is 0.61 and the YPEG valuation is around $33 1/2. Both numbers imply additional upside to these shares. The price/sales ratio (PSR) of 1.6 is below the industry leaders (Lucent trades at a PSR of 2.7).

Inter-Tel participates in a very competitive business and its competitors are very strong and savvy. The future of Internet telephony is still to be determined. A Foolish investor would be advised to look carefully at these shares before buying. That said, Inter-Tel does look worth a close look.

-Mark Weaver, MD (MWEAV@aol.com)

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