Will Polycom Ever Find the Bottom?

Shares of Polycom (Nasdaq: PLCM  ) hit a 52-week low on Tuesday. Let's take a look at how it got there and see whether cloudy skies are still in the forecast.

How it got here
Like other networking infrastructure providers, Polycom, whose primary products are based around videoconferencing, found its shares at a new 52-week low yesterday due to concerns about global IT spending.

Heading into the year, networking providers expected that U.S. domestic providers would be raising their capital expenditures over their anemic fourth-quarter levels. AT&T (NYSE: T  ) confirmed it would increase spending earlier in the year, but we've yet to see this trend take hold in videoconferencing firms' bottom lines.

Polycom has seen unprecedented weakness in North American spending, which parallels Cisco Systems' (Nasdaq: CSCO  ) two consecutive quarters of weakness in its telepresence line of videoconferencing products. Radvision (Nasdaq: RVSN  ) shareholders can consider themselves lucky to be acquired by Avaya, as it too reported another revenue decline and continued losses in its latest quarter. Even Logitech International (Nasdaq: LOGI  ) , whose shares have been strong despite the market weakness, suffered a nearly 10% decline in its LifeSize videoconferencing products segment.

Not all hope is lost, however. In May, Polycom sold its enterprise voice solutions business to private equity firm Sun Capital Partners for $110 million. In addition to its already cash-rich balance sheet of $564.2 million with no debt, the company plans to use these proceeds to boost its remaining $78 million for use in share buybacks to $182 million. Although IT spending still has Polycom's earnings in limbo, at just 1.3 times book value and 10 times forward earnings, it's bound to attract some value investors looking for a deal.

How it stacks up
Let's see how Polycom stacks up next to its peers.

PLCM Chart

PLCM data by YCharts.

Despite the huge rebound in tech over the past three years, videoconferencing providers have largely been left out of the loop.

Company

Price/Book

Price/Cash Flow

Forward P/E

5-Year Revenue CAGR

Polycom 1.4 7 9.9 17%
Cisco Systems 1.7 7.8 8.4 8.7%
Logitech Int'l 1.4 8.7 10.9 2.3%
Radvision 2.2 N/M N/M (3%)

Source: Morningstar; author's calculations. N/M = Not meaningful.

As I inferred above, the slowdown in videoconferencing spending is being felt across the sector, but these metrics make it even easier to see.

Outside of Radvision, which is losing money hand over fist, the other three companies here are decisively profitable and relatively cheap. Where we begin to notice the biggest differences is in their growth rate over the past five years.

Logitech's sales are very dependent on PC sales, and its legacy equipment sales are what dragged down its results for so many years. It's no longer the fast-growth company it once was, but it could still offer a nice value for investors banking on a turnaround.

Really, this comes down to a two-horse race between Cisco Systems and Polycom since TEKELEC was bought out. Although both appear to be an extremely attractive value, Polycom's quicker growth rate offers the greatest chance of appreciation for investors with a greater appetite for risk, while Cisco's diverse business platform and dividend offer income-seeking investors a stable networking play.

What's next
Now for the $64,000 question: What's next for Polycom? That question depends largely on whether domestic telecom companies open up their wallets and begin spending again. Until that happens, Polycom's results are likely to lag the networking peripherals sector as a whole.

Our very own CAPS community gives the company a four-star rating (out of five), with 90.7% of members expecting it to outperform. Although I've yet to make a CAPScall in either direction on Polycom, I'm going to rectify that now by placing a CAPScall of outperform on the stock.

The reason here is simple: I feel Polycom has the best technology available among its peers. As the demand for telecommunications infrastructure rises with content becoming increasingly digital, it will only be a matter of time before domestic telecoms begin spending again. Polycom and Cisco will be the biggest beneficiaries. However, with Cisco focused on other facets of its business, look for Polycom to garner share from its bigger rival and possibly use its huge cash pile to make further acquisitions. I consider Polycom a good candidate to turn its fortunes around at this level.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Cisco Systems and Logitech International. Motley Fool newsletter services have recommended buying shares of Polycom and Logitech International. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On June 09, 2012, at 10:23 AM, rustybayonet wrote:

    Great article, thanks Sean. One nit and one comment.

    The nit is that I think that you meant Tandberg, and not Tekelec, since the latter was not a Polycom competitor, and the former was, and was actually bought by Cisco.

    The comment is that the big trend in 'telecommunications' is towards unified communications, which is now deployed by 39% of the Fortune 500. In that regard, Polycom is not well positioned, since it does not sell a UC platform (despite what its marketing spin says). Avaya bought Radvision to complete their UC platform, but too little too late, IMHO. The winners in UC are Cisco and Microsoft. Although neither company's larger business prospects will be much affected by that in the short term.

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