Daily Double
October 21, 1999

Powerwave Technologies Inc.

Ticker: (Nasdaq: PWAV)
Phone: 888-797-9283
Website: www.powerwave.com
Price (10/20/99): $60 13/16

By Paul Larson (TMF Parlay)

How Did it Double?

Wireless telecommunications has been hot, and many stocks have ridden the wave. One of the companies that has seen an uptick in both its profits and its stock price is Powerwave. After trading as low as $8 last October, the stock price has risen steadily over the past 12 months, giving just about anyone who bought in the last year some high-voltage gains.

Extend the focus back a year and Powerwave would have made for an excellent Daily Trouble. The stock had fallen from $40 all the way to the single digits as the Asian flu hit hard on the company's top and bottom lines. Plus, Powerwave was purchasing product lines from other companies, and many thought this to be a sign of the weak mating with the weaker.

However, the company's most recent earnings announcement shows that many of those fears were unwarranted. Powerwave has been able to expand its margins at the same time it is integrating acquired businesses. This is almost always a sign of strength. With the wireless market hot as a pistol and the Asian flu largely behind Powerwave, the company is back on growth track. Not surprisingly, the stock price is also back on track, recently making new all-time highs.

Business Description

Based in Irvine, California, Powerwave is one of the nation's leading suppliers of high performance radio frequency (RF) power amplifiers for use in wireless applications. The company's amplifiers boost radio signal strength and reduce interference, and Powerwave's products are most commonly used in cellular phone networks as well as with two-way radios.

In October 1998 Powerwave purchased the RF power amplifier business unit of Hewlett-Packard (NYSE: HWP). Over 35% of Powerwave's sales in the most recent quarter were to telecommunications equipment titan Nortel Networks (NYSE: NT).

Financial Facts

Income Statement
12-month sales: $241.4 million
12-month income: $4.7 million
12-month EPS: $0.16
Profit Margin: 1.9%
Market Cap: $1,261.4 million

Balance Sheet
Cash and Equivalents: $71.9 million
Current Assets: $151.3 million
Total Assets: $198.4 million
Current Liabilities: $45.8 million
Long-term Debt: $0.6 million
Total Liabilities: $46.4 million

Ratios
Price-to-earnings: 380.1
Price-to-sales: 5.2

How Could You Have Found This Double?

One possible way to have seen Powerwave's rise coming was to look at the company's margins and cash flow over time. The company's operating margin has risen for four straight quarters now, which is fairly impressive given the size of the Hewlett-Packard acquisition. Plus, the company's cash flow from operations has been accelerating for some time now, and the ability to effectively generate cash is an attractive quality in companies.

Looking at Powerwave's market could have also shown that its troubles last year were temporary. Economies come and go, and it should have been apparent that the Asian flu wasn't a fatal disease.

Finally, the wireless market as a whole is finally seeing a renaissance in usage as well as investor confidence. Powerwave's products provide an important piece of the overall wireless network puzzle. In other words, those selling the picks and shovels for the wireless gold rush were set to benefit.

Where to From Here?

It's fairly easy to predict that the overall wireless market will continue to boom for the foreseeable future. Both here and abroad, use of wireless devices of all kinds looks to continue its vibrant growth. There are some extremely valid reasons why Powerwave and many of its peers have been bid up by Wall Street.

Looking at Powerwave in particular, it will be imperative that the company continues to smoothly integrate its operations with that of the old Hewlett business. So far, it looks like the consolidation has worked out well, but investors should keep tabs on the production efficiency of the company.

Powerwave's balance sheet is relatively clean, even after putting down a chunk of change (almost $60 million) for the Hewlett business. This is largely thanks to a secondary offering of shares the company had in March of this year. With excess cash, minimal debt, and high-flying stock price, it wouldn't be surprising at all to see Powerwave attempt another acquisition or two down the road.

Looking at the company's valuation, it should be plainly evident that the bulls outnumber the bears on Wall Street. The company is expected to earn $1.12 a share next year, which puts the stock at well over 50x forward earnings. However, Powerwave is growing by leaps and bounds, and the company's intrinsic value may in fact be higher than what it appears at first glance.

Of course, anyone thinking of investing in Powerwave should study the company's products and its market very carefully. And for those willing to take the extra research step, Powerwave could prove to be an interesting company to watch and own.

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