Knocking Down Powerwave

The wireless market is hot, with companies like Apple (Nasdaq: AAPL  ) benefiting from the sales of its iPhones. That should be good news for Powerwave (Nasdaq: PWAV  ) , right? But even though the company develops sophisticated solutions for wireless networks, the stock has meandered. Things became even worse when the stock fell 11% to $5.50 on Tuesday because of Powerwave's Q3 report.

Despite an impressive 38% increase in revenue to $200.7 million, Powerwave still posted a net loss of $28.6 million, or $0.22 per share. Then again, the company also incurred restructuring charges, as well as the amortization of intangible assets. But even if you exclude such things, Powerwave still suffered a loss of $10.2 million, or $0.08 per share.

Since late last year, Powerwave has been restructuring its operations. A key initiative is the consolidation of its three manufacturing facilities in China to one facility in Suzhou. The goal is to boost gross margins to the mid-20% level. 

But in light of dynamic industry changes, this isn't going to be easy. Consider the actions of Powerwave's major customers. In April, Nokia (NYSE: NOK  ) and Siemens (NYSE: SI  ) created a joint venture of their wireless infrastructure divisions. The new entity now accounts for 36% of Powerwave's revenue. 

There was also the megamerger last year that created Alcatel-Lucent (NYSE: ALU  ) , which now provides 15% of Powerwave's revenue.

With all this consolidation, Nokia/Siemens and Alcatel-Lucent should experience more pricing power. These companies are also looking at ways to bring some manufacturing functions in-house, which could put even more pressure on Powerwave.

If Powerwave's customers do gain pricing power, it could cause the company considerable problems. Because Powerwave has a concentrated customer base, I would suggest caution. I don't see any catalysts ahead to get the stock price back on track.

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