By Paul Larson (TMF Parlay)
June 22, 2000

Newport Corp.

Ticker: (Nasdaq: NEWP)
Phone: 949-253-1405
Website: www.newport.com
Price (6/21/00): $92 1/2

How Did It Double?

Among the hottest sectors on Wall Street these days is the fiber optic industry. One only has to look at the parade of fiber companies we have highlighted in this column to see that this is true. From JDS Uniphase (Nasdaq: JDSU), to Corning (NYSE: GLW), to Tollgrade (Nasdaq: TLGD), it seems any company remotely related to fiber has seen its stock do very well over the past year. Today's Double, Newport Corp., continues the string of fiber-related companies that have skyrocketed and grabbed our attention.

The increased demand for high-precision optical equipment is evident in Newport's financial statements. In the first quarter, total sales were up 55% from the previous year to $45.6 million. However, sales into the optical communications industry were up roughly 200% year-over-year and 42% sequentially. Over the past year, fiber optic equipment sales have gone from 18.7% of Newport's business to 36.6% and growing.

The bottom line also benefited from this growth. In the first quarter, total net income rang in at $3.0 million, more than triple the $0.9 million in the same period of 1999. With the strength seen in the stock price, Wall Street is obviously expecting much more bottom-line growth in the future.

Longtime Newport shareholders must be smiling, with the company's core business growing at a very healthy rate. Nevertheless, what really must have them grinning is the fact that the stock is up almost 20-fold over the past year, making it one of the best performing issues on the Nasdaq.

Business Description

Based in Irvine, California, Newport Corp. is a leading supplier of instruments and integrated systems utilized in the fiber optic industry. Newport's systems are also used in the production of semiconductors, computer peripherals, and aerospace components, as well as for various private and academic research applications. The company's products are designed to enhance productivity by helping to automate the manufacturing process for extremely high-precision components.

Newport split its stock 3-for-1 on June 1.

Financial Facts

Income Statement
12-month sales: $158.1 million
12-month income: $10.4 million
12-month EPS: $0.36
Profit Margin: 6.6%
Market Cap: $2,795.5 million

Balance Sheet
Cash: $2.8 million
Current Assets: $84.8 million
Current Liabilities: $33.3 million
Long-term Debt: $12.5 million

Ratios
Price-to-earnings: 256.9
Price-to-sales: 17.7

How Could You Have Found This Double?

One way to have caught wind of Newport's improving profits would have been to look at the company's margins. We say it time and again in this space -- increased margins mixed with rising sales makes for an explosive profit picture. For Newport, sales growth has been quite healthy, and the company's operating margin has also been on the rise.

Another way to have perhaps found Newport was to have looked at the company's new focus on the high-growth optical industry. Through several acquisitions, including one of Corning's subsidiaries, Newport was clearly positioning itself to take advantage of the hyper growth in the fiber optics industry.

Where to From Here?

Newport has indicated that it expects more growth in the coming months thanks to continued strength in the fiber optic industry, which is prominently evidenced by the company's fairly large order backlog. For the coming year, the mean analyst profit estimate stands at $0.48 per share, a decent 60% increase from 1999's showing.

As one might expect with a company that has seen its stock rise 20-fold, valuation is a concern. At this writing, Newport is trading at more than 17x sales and at nearly 200x forward profit estimates. The million-dollar question is, "Does the growth justify the valuation?" Interested investors should look closely at the industry and company dynamics to assess for themselves the future growth possibilities and competitive landscape.

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