1. Introduction
ARRS came to my attention on HLIT's thread. ARRS and HLIT are direct competitors, but ARRS seems to have much more attractive fundamentals.
So I'm planning to trade HLIT for ARRS, let's see if the following analysis confirms my thinking.
2. Profile
ARRIS Group, Inc. (ARRS) engages in the development, manufacture, and supply of telephony, data, video, construction, rebuild, and maintenance equipment for the broadband communications industry worldwide. (complete profile here (http://finance.yahoo.com/q/pr?s=ARRS))
3. Technical Analysis
3.1. All History Chart
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=31841;image)
The all history chart shows a stock getting ready to recover some of the shine it had in the past.
3.2. Medium Term Chart
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=31842;image)
The medium term trend is bullish, as shown by the ascending trendline on the chart. The stock is at a critical medium term point, fighting for the fifth time with the 2006 descending trendline. Will it breakout?
3.3. Short Term Chart
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=31843;image)
I really enjoy this short term chart, with the positive reaction after the closing of that gap and volume picking up strongly to 7.8 million shares.
4. Fundamental Analysis
4.1. Number of Shares Outstanding + Market Cap
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=31844;image)
The share count has gone up some over the last few quarters, and it will go up even more after the completion of the Tandberg Television acquisition, as you can read here:
• ARRIS Releases Details of $1.2B Acquisition of TANDBERG Television and Tuesday, January 16th, 8:30 AM EST Conference Call (http://biz.yahoo.com/prnews/070115/clm050.html?.v=67)
PR Newswire (Mon, Jan 15)
The good news is the more ARRS rises, the less shares it will need to issue to fund part of the acquisition.
4.2. Long Term Debt + Current Ratio
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=31845;image)
It looks like ARRS had a too much strong balance sheet, so it had to blow it all making a huge acquisition ::) But I like this acquisition, and of course they need growth. The balance sheet will change a lot, with $520 million of new debt.
4.3. Revenues + Gross Margin
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=31847;image)
Revenues are now back to the 99/2000 levels, when the stock was trading at $50 a share.
The metrics I usually study show a bit worse picture for ARRS when compared to its industry average, but on a profit basis ...
4.4. EPS + Net Profit Margin
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=31848;image)
Look at the phenomenal turnaround in profits and especially net profit margin, which is at its highest ever, at 10.69%. My take is fundamentals are better now they have ever been.
4.6. Recent News
• ARRIS Releases Details of $1.2B Acquisition of TANDBERG Television and Tuesday, January 16th, 8:30 AM EST Conference Call (http://biz.yahoo.com/prnews/070115/clm050.html?.v=67)
PR Newswire (Mon, Jan 15)
I have to study more about Tandberg, but at first sight, it looks like a great acquisition to me (not completely sure about the price paid, but I want to be in "digital TV solutions including IPTV, HDTV, video-on-demand, advertising on-demand, and interactive TV applications to customers in the Americas, Asia Pacific, Europe, Middle East and Africa.")
5. General Overview
I've been learning to go with the industry leader at most of the times. I used to go for the smaller competitor, because I thought this way the company had more upside potential, but as I learn more and more about long term growth perspectives and the huge world market size, I prefer to buy the industry leader (given that it isn't a mammoth like CSCO - for CSCO the size of the world market makes a difference).
I was in HLIT because of digital video and stuff like that, but ARRS seems better positioned to take advantage of future growth. Also, it looks fundamentally more attractive and the chart is also more promising in my opinion.
6. Trading Plan
Buy 6.66% of capital in ARRS.
fyi:
Arris "outperform"
Tuesday, January 16, 2007 7:53:28 AM ET
Morgan Keegan
LONDON, January 16 (newratings.com) - Analysts at Morgan Keegan maintain their "outperform" rating on Arris Group Inc (ARRS.NAS).
In a research note published this morning, the analysts mention that the company has announced the takeover of Norway-based Tandberg TV for a total consideration of $1.2 billion. The deal is likely to exert pressure on Arris' earnings in the first year after the takeover, the analysts say. The takeover is a strategic fit for the company, since it expnsts the product portfolio into video equipment and a more diverse international exposure, Morgan Keegan adds.
&
Arris "hold," target price raised
Wednesday, January 17, 2007 2:07:33 AM ET
Brean Murray, Carret & Co
NEW YORK, January 17 (newratings.com) - Analyst Eric C Buck of Brean Murray maintains his "hold" rating on Arris Group Inc (ARRS.NAS), while raising his estimates for the company. The target price has been raised from $11 to $13.
In a research note published yesterday, the analyst mentions that the company has announced the proposed acquisition of Tandberg Television for $1.2 billion. The takeover is likely to shift Arris' business mix and might significantly diversify the company's customer and industry base, the analyst says. The company expects to report its 4Q06 sales and earnings ahead of expectations. The EPS estimates for 4Q06 and 2006 have been raised from $0.27 to $0.30 and from $0.99 to $1.02, respectively.
>:D >:D
Oliver
Actually ARRS was the 1st profitable trade you made on 3SOF: http://www.3stocksonfire.org/closed_trades.php, how could you forget? :o
I was reading the 3SOF trading history and trying to find out what exactly made you transit from a successful short-term technical trader to a strong believer in long-term investor... interestingly, the three best trades you made in your "yester-life" as a trader/speculator were all BB or PK stocks: AMRE.OB, NAUC.PK and BRUO.OB. I bet it must be very hard for you to resist the speculative temptation that, from time to time, still shows up in your recent trades ;D I admire your resolve to make this transition.
Quote from: realcoolhead on January 17, 2007, 09:32:52 PM
Actually ARRS was the 1st profitable trade you made on 3SOF: http://www.3stocksonfire.org/closed_trades.php, how could you forget? :o
I was reading the 3SOF trading history and trying to find out what exactly made you transit from a successful short-term technical trader to a strong believer in long-term investor... interestingly, the three best trades you made in your "yester-life" as a trader/speculator were all BB or PK stocks: AMRE.OB, NAUC.PK and BRUO.OB. I bet it must be very hard for you to resist the speculative temptation that, from time to time, still shows up in your recent trades ;D I admire your resolve to make this transition.
Interesting observations about David's prior 3SOF trades realcoolhead!
This dichotomy has me very curious as well David ;)
I started a thread for this question of long term investing vs. short term investing that I hope you might grace with your opinion, though in some sense you have answered it indirectly in many replies to all of us in various threads.
http://www.3stocksonfire.org/trading/index.php?topic=8734.msg84701#msg84701
Quote from: realcoolhead on January 17, 2007, 09:32:52 PM
Actually ARRS was the 1st profitable trade you made on 3SOF: http://www.3stocksonfire.org/closed_trades.php, how could you forget? :o
I was reading the 3SOF trading history and trying to find out what exactly made you transit from a successful short-term technical trader to a strong believer in long-term investor... interestingly, the three best trades you made in your "yester-life" as a trader/speculator were all BB or PK stocks: AMRE.OB, NAUC.PK and BRUO.OB. I bet it must be very hard for you to resist the speculative temptation that, from time to time, still shows up in your recent trades ;D I admire your resolve to make this transition.
Well, one reason is the low liquidity of those OTCBB and PK stocks. I couldn't trade that way for much longer because the portfolio size wouldn't allow it. BRUO.OB? I don't think I ever bought a stock with that name, I guess that one wasn't me.
Yes, this transition is kind of hard, but I'm sure it's worth it. I wrote some more about short term and leveraged speculation on the Members Corner. I also admire you for having a realcoolhead 8)
QuoteI started a thread for this question of long term investing vs. short term investing that I hope you might grace with your opinion, though in some sense you have answered it indirectly in many replies to all of us in various threads.
I wrote there and will keep writing if there's additional demand :)
As for ARRS, of course I remember that trade. I knew little about investing in stocks back then (and I'm afraid I know little now when compared to what I'm about to learn over the next 18 months).
I feel tired today, I'm sorry, I'll just say that I think I did well in selling HLIT and buying ARRS instead. ARRS will probably face some problems over the short term because of the resistance levels on the chart below, but ultimately fundamentals, which are attractive, will prevail.
I'll continue holding ARRS.
According to the numbers provided by ARRS (http://biz.yahoo.com/prnews/070115/clm050.html?.v=67), the combined company ARRS + Tandberg will have 2006 annual revenues of about $1.23 B, rising from $887 M expected for ARRS alone.
The gross margin will increase from 29% for ARRS to 36.6% for the combined company.
The share count of ARRS will increase, due to this acquisition, from the current 107.82 million shares, to a maximum of 129.23 million shares:
«The number of shares to be issued will not exceed 19.9% of ARRIS' outstanding shares.»
The higher the share price, the lower the number of shares to be issued.
We don't know what the future market cap will be because we don't know the number of shares to be issued and of course we don't know what the future share price will be (market cap = # shares outstanding*share price).
At the current price, we're talking about 15.4 million new shares, so the market cap would then be 129.23*$13.11 = $1.694 B.
The revenue multiple is ($1.694 B/$1.23 B) = 1.38. The Communication Equipment industry average is 1.60.
So, given just this revenue multiple comparison to the industry average, we can see ARRS needs to rise about 19% to be valued at average.
But my point is ARRS should be valued at more than average, as the company positioned itself to benefit from the expected explosive growth of IPTV, HDTV, video-on-demand, advertising on-demand, and interactive TV applications.
I believe I'm on the right play for this trend that I believe in.
I'll keep holding ARRS.
I believe the Tandberg acquisition is a good deal, but if it's not consummated due to several possible reasons, ARRS will still receive some money:
«The Transaction Agreement provides for, among other things, the making of the Tender Offer, covenants by ARRIS and Tandberg, including Tandberg's covenant to assist ARRIS in taking all reasonably necessary steps to close the financing and bank facility contemplated in the commitment letter (as described below), restrictions on Tandberg's ability to further market the company, and the payment to ARRIS of an $18 million termination fee in the event a competing offer is made, the Transaction Agreement is terminated and an alternative transaction is consummated within a set period of time after termination of the Transaction Agreement, or if Tandberg's board of directors changes its recommendation of the transaction.»
Technically ARRS is banging on the door of the $13.8 resistance level. I'm expecting the stock to eventually break this resistance on the upside and I'll keep holding ARRS.
ARRS was up a bit yesterday, despite the Nasdaq 100 1.09% fall. ARRS is still fighting with the descending medium term trendline and the $13.80 horizontal resistance level.
I expect it to breakout, let's just give it time.
Hmmm, I didn't know Barclays was a 3 Stocks subscriber, it looks like they own ARRS too ;D (as well as WCG as you read on that stock's thread)
Barclays Global Investors holds 4,249,712 ARRS shares, or 3.94% of the company.
Unfortunately it still couldn't breakout above $13.80, maybe today? I'll hold.
QuoteUnfortunately it still couldn't breakout above $13.80, maybe today?
Not yet, it closed at $13.69? Perhaps today? I'll hold !
What ARRS needs now is a long and white marubozu with volume above average, breaking out of this boring $13.8 resistance level. The general market didn't help the stock on its task yesterday, maybe today?
QuoteWhat ARRS needs now is a long and white marubozu with volume above average, breaking out of this boring $13.8 resistance level. The general market didn't help the stock on its task yesterday, maybe today?
No, it failed to breakout above $13.8, so short term traders bailed out of the stock. I'll keep holding, though, due to the positive fundamental background and the medium and long term technical bullish picture.
ARRS will make an investors presentation next Monday:
• ARRIS to Present at the Thomas Weisel Partners Technology Conference 2007 (http://biz.yahoo.com/prnews/070124/clw178.html?.v=3)
PR Newswire (Wed, Jan 24)
I'm very interested on this because I confess I'm still not totally convinced about the bullish nature of ARRS's business. I need to learn more to make my hands stronger.
I also hope the presentation will be the catalyst for ARRS to push and close above the all important $13.80 resistance level.
In the meantime I'll keep holding ARRS.
ARRS ascending support stands at $13.15, the horizontal resistance is $13.80, so this is an ascending triangular pattern, I'll keep holding expecting the bullish breakout anytime.
Oh yeah baby, that big, fat and powerful breakout above the $13.8 resistance level just happened !
This makes all the people that sold below the resistance wrong. They need to get back in to correct that mistake, and that's what makes share prices rise.
Fundamentally, as you can read on the rest of this thread, ARRS was too cheap to begin with. And the Tandberg acquisition makes its global market potential and reach more profound.
I need to own something in the video/video on demand space and ARRS seems the ideal holding. Making 7% profit on this trade now, the market has validated the trade, nothing else to do but to keep holding.
The technical players saw the all important technical breakout on Wednesday and rushed to buy ARRS at yesterday's open, hence the gap up. Then the stock came down to fill the gap. This is normal market activity.
On Monday ARRS will present at the Thomas Weisel Partners Technology Conference and I'll be listening. The company also said yesterday it will release results on February 15th:
• ARRIS Group, Inc. Earnings Call scheduled for Thu, Feb 15 (http://biz.yahoo.com/cc/5/77325.html)
CCBN (Thu 1:10pm)
I'll continue holding ARRS, attractive both from a technical and fundamental perspective.
ARRS now spent two days above the all important $14.3 resistance level, so the resistance is definitely broken on the upside. Probably bulls will push the stock higher across this week.
Results will be out on February the 15th, and I expect to hear more details about the Tandberg acquisition over the conference call that will follow. I don't have any doubts that the right thing to do is to continue holding ARRS, as the stock is attractive both from a fundamental (14.5 trailing earnings multiple) and technically (closed at a five year high on Friday).
ARRS was able to close exactly at the $14.3 support, after a dip in the morning trading on low volume. I see the stock as cheap, as you can read on the rest of this thread, and the right place to benefit from the current trends toward IP TV, video on demand technologies, video on the web and all that exciting stuff.
Cheap, but in an attractive and growing sector.
I've heard the Thomas Weisel Partners Technology Conference, with ARRS CEO presenting, which you can listen here:
http://www.veracast.com/webcasts/twp/tech07/97101197.cfm
After this, and re-reading this thread, I have no doubts that ARRS is a sound long term investment, on the right place at the right time.
Technically the stock yesterday closed at the highest close in 5 and a half years. I'll keep holding ARRS.
ARRS closed at a new high yesterday, the trend is your friend, hold on to those shares.
Today's update is exactly the same as yesterday's:
QuoteARRS closed at a new high yesterday, the trend is your friend, hold on to those shares.
ARRS had a small pullback in sympathy with the general market. I'll continue holding ARRS.
ARRS is pulling back to touch support, prior resistance, at $14.3.
Earnings will be out on Thursday:
«Networking solutions provider ARRIS Group (Nasdaq: ARRS) made headlines last month for its proposed acquisition of digital video and IPTV hardware provider TANDBERG Television. A couple of brokerage analysts also believe ARRS' fourth-quarter earnings could also make headlines. Two analysts have raised their forecasts over the past 30 days, causing the consensus estimate to rise by a penny to 26 cents per share. The Most Recent Consensus is more bullish at 27 cents per share. ARRS has topped expectations for two consecutive quarters, though the company's first-quarter results were below analysts' projections. ARRIS Group is scheduled to report on Thursday, Feb 15, after the close of trading.»
I'll keep holding ARRS.
I guess ARRS has been down over the last 3 trading days because 4Q results from Tandberg TV were disappointing:
• UPDATE - Tandberg TV profits down, says had several suitors (http://yahoo.reuters.com/news/articlehybrid.aspx?storyID=urn:newsml:reuters.com:20070208:MTFH37194_2007-02-08_16-59-19_L0867521&type=comktNews&rpc=44)
at Reuters (Thu, Feb 8)
Anyway, I still see ARRS as cheap. Its own results will be released tomorrow after the market closes. I'll make a more detailed analysis of ARRS on tomorrow's update.
I'll continue holding the stock.
The main reason that led me to switch from HLIT to ARRS was that ARRS is stronger and cheaper, so it wouldn't make any sense for me to let go of the stock now that it is about to report 4th quarter earnings.
ARRS earnings were out and better than expected:
«NEW YORK (MarketWatch) -- Arris Group Inc. said late Thursday fourth-quarter earnings rose to $70.3 million, or 64 cents a share, from $22 million, or 20 cents a share, a year earlier on demand for VoIP and high-speed data products. Excluding amortization, equity compensation expense, restructuring accrual adjustments and tax benefits, non-GAAP earnings in the most recent quarter were 32 cents a share.
Analysts polled by Thomson Financial expected, on average, fourth-quarter earnings of 28 cents a share, before items. The Suwanee, Ga., telecommunications company's revenue for the fourth quarter increased 29.4% to $234.6 million from $181.3 million a year ago. Wall Street was looking for revenue of $230 million.»
For the full year of 2006, ARRS EPS was $1.30. Excluding special items 2006 EPS was $1.04. This puts ARRS's trailing earnings multiple at $14.73/$1.04 = 14.
This looks too cheap to me, considering the growth the company has been experiencing lately. Here's the complete press release:
• ARRIS Announces Preliminary and Unaudited Fourth Quarter and Full Year 2006 Results (http://biz.yahoo.com/prnews/070215/clth163.html?.v=5)
There were also reports out with some more information about the Tandberg acquisition. Here's a summary of what the new combined company will be:
«Combining the resources and experience of ARRIS and TANDBERG Television will produce a new company, unique in its ability to enable voice, video and data over any network and to any consumer device. ARRIS is a leading global provider of VoIP, data broadband network equipment and consumer premises devices; TANDBERG Television is a market leader in both the digital video sector and the global video processing market with award-winning solutions for advanced compression, on-demand and interactive television.
ARRIS and TANDBERG Television have a strong shared philosophy of innovation and track-records of profitable growth. The merged company will have a significant global presence with over 1600 employees and more than 2000 customers in more than 100 countries. ARRIS' strong North American cable business and strategic customers in key international markets will be significantly expanded through TANDBERG Television's international market leadership position in IPTV, HDTV and on-demand television.»
PR Newswire (Thu, Feb 15)
I want to participate in these industries and ARRS looks to have the best reward/risk ratio in the space, because it has strong growth capability and valuation is cheap when compared to its industry's peers.
I'll continue holding ARRS.
Question for tomorrow:
"What is the combined calendar 2006 revenue and net income for ARRS and Tandberg TV?"
Technically nothing changed on ARRS, the stock remains bullish, I'll remain long.
Nice day for ARSS up over 4% right now
Quote from: nullzero on February 21, 2007, 01:40:07 PM
Nice day for ARSS up over 4% right now
Yep, nice move on strong volume :)
QuoteWhat is the combined calendar 2006 revenue and net income for ARRS and Tandberg TV?
Well, ARRS had revenues of $891.6 M and net income of $142.3 M.
Tandberg TV had revenues of $350.3 M and net income of $55.6 M (as you can check here: http://www.tandbergtv.com/NewsView.ink?Newsid=1138)
So, the combined company had 2006 revenues of $1.242 B and net income of $197.9 M.
The current market cap, including 14.5 million newly issued shares to buy Tandberg TV, is 122.32 million*$15.26 = $1.867 B. So, the trailing earnings multiple of the combined company is $1.867 B/$197.9 M = 9.43.
Cheap my all means. ARRS should at least double from current levels.
I became more confident about ARRS and its prospects after yesterday's update. The stock gave back about half of Wednesday's gain. I say this is normal market behavior and the trend, the thing that gives a man money over the long term, is bullish, so I'll continue holding ARRS.
Friday's close was the highest since 2000. My Thursday update says it all:
QuoteWell, ARRS had revenues of $891.6 M and net income of $142.3 M.
Tandberg TV had revenues of $350.3 M and net income of $55.6 M (as you can check here: http://www.tandbergtv.com/NewsView.ink?Newsid=1138)
So, the combined company had 2006 revenues of $1.242 B and net income of $197.9 M.
The current market cap, including 14.5 million newly issued shares to buy Tandberg TV, is 122.32 million*$15.26 = $1.867 B. So, the trailing earnings multiple of the combined company is $1.867 B/$197.9 M = 9.43.
Cheap my all means. ARRS should at least double from current levels.
I'll continue holding ARRS.
David, I assume you are aware by now of this piece of negative news for Arris:
"Ericsson bids $1.4 billion cash for Tandberg
Trumps Arris Group's January offer; interest in Net-based TV grows
Last Update: 9:19 AM ET Feb 26, 2007
LONDON (MarketWatch) -- Ericsson AB, the world's largest maker of wireless network gear, on Monday offered 9.8 billion Swedish krona ($1.4 billion) in cash for Norway's Tandberg Television, topping Arris Group's earlier bid.
The Swedish company, eager to position itself for the convergence of telecommunications and television, is hoping an acquisition of Tandberg will help it capitalize on increased demand and investment in TV delivered over the Internet. A large part of the traffic growth generated in the world's mobile and fixed networks is expected to be generated by TV services in the years to come.
Ericsson, which already owns an 11.7% stake in Tandberg, is bidding 106 Norwegian kroner for each Tandberg share.
Suwanee, Ga.-based Arris (ARRS) on Jan. 15 offered 96 kroner a share. Tandberg, whose directors previously approved the Arris bid, said its board will review the new offer and later issue a recommendation.
Traded in Oslo, Tandberg's shares rose 11% in afternoon trading.
Ericsson's shares rose 0.6% in Stockholm.
At stake for the rival suitors is about a quarter of the global market for video processing. Tandberg had net income of $12.1 million in the fourth quarter on sales of $85.3 million.
Tandberg has seen rising demand for its products and services as telecom operators such as the Netherlands' Royal KPN (KPN) have started to invest in broadcasting equipment, and as digital technology has displaced analog networks.
J.P. Morgan analysts said they that while they like the strategic rationale behind Ericsson's offer, they see risk of a counterbid. Echoing this, Dresdner Kleinwort told clients that Arris or Motorola Inc. could come back with a higher offer.
Thanks for posting the news webby67, my news service didn't have that news, but I saw the stock down a lot over the pre-market so I checked other websites and saw that Erickson $1.4 B offer for Tandberg.
ARRS was very attractive on its own and it will receive compensation for this, so I see the current 11% fall as a buying opportunity.
I'll write a deeper analysis on the subject over the next update.
The news out yesterday was:
• Ericsson trumps Arris' bid for Tandberg with $1.4 bln offer (http://us.rd.yahoo.com/finance/external/cbsm/SIG=12lqha7ee/*http://www.marketwatch.com/news/story/ericsson-trumps-arris-bid-tandberg/story.aspx?guid=%7B4C3B15E5%2D425F%2D46E9%2D8DED%2D09509F0F05F3%7D&siteid=yhoo&dist=yhoo)
at MarketWatch (Mon 4:28am)
This offer is $200 M more than ARRS's, and it is an all cash offer, whereas the ARRS offer had a component of shares.
I believe ARRS should walk away from Tandberg and let Ericsson have it. This fight is way out of its league. However, yesterday the market priced in the risk of an Arris counter-offer, because the company said the following:
• Arris 'evaluating' Ericsson offer for Tandberg Television (http://us.rd.yahoo.com/finance/external/cbsm/SIG=11iiumket/*http://www.marketwatch.com/News/Story/Story.aspx?guid=%7bB39BFB51-E333-4055-8986-9CADE061327D%7d&siteid=yhoo&dist=yhoo)
at MarketWatch (Mon 1:05pm)
I think ARRS will settle this and get its $18 M as a termination fee:
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=33915;image)
Without Tandberg ARRS is a $1.5 B market cap company with $142 M in net income in 2006, that is, a trailing earnings multiple of 10.56. The balance sheet was and will continue to be extremely strong.
I love ARRS without Tandberg. I just hope they don't enter a bidding war with ERIC.
I'll continue holding ARRS.
ARRS had the most horrible two days sell off. Still, I'm losing just 1.66% on the stock. I believe a worldwide recession (http://www.3stocksonfire.org/trading/index.php?topic=9050.msg90421#msg90421) will curb demand for its products. It was good that Erickson made that counter bid for Tandberg.
I'll sell ARRS today.
Since I sold ARRS a lot has changed. I'm no longer expecting a worldwide recession, far from it, as you can read on my latest update to the "Correction or Bear Market?" thread: Re: Correction or Bear Market? (latest update) (http://www.3stocksonfire.org/trading/index.php?topic=9050.msg93271#msg93271)
Back then investors were worried that ARRS could enter a bidding war with Ericsson for Tandberg TV, but that didn't happen:
• ARRIS Will Not Extend or Increase Offer for Tandberg Television (http://biz.yahoo.com/prnews/070308/clth161.html?.v=8)
PR Newswire (Thu, Mar 8 )
Instead it's using its enormous pile of cash ($548 M) to expand organically:
• ARRIS Announces Opening of Major Research & Development Center in Shenzhen, China (http://biz.yahoo.com/prnews/070319/clm015.html?.v=78)
PR Newswire (Mon, Mar 19)
ARRS grew revenues at a 31% pace in 2006 from 2005. Excluding special items, net profit margin in 2006 was 12.3%. If these numbers continue for the next 10 years, in 2017 ARRS will have revenues of $13.26 B and net income of $1.63 B. Apply an average 16 times earnings and get a $26 B market cap.
That means an average annual share price increase of:
$1.46 B*(X^10) = $26 B <=> X = 33.4%
The trading plan is:
Buy ARRS, 6.66% of capital as always.
ARRS didn't react well to the 50 days SMA resistance level, but that's just a technical short term problem. Longer term fundamentals reign supreme, and I see the stock as an undervalued growth play.
We have a lot to cover as the news keeps rolling in, but let's start by closing the issue of the Tandberg TV acquisition:
• ARRIS Will Not Extend or Increase Offer for Tandberg Television (http://biz.yahoo.com/prnews/070308/clth161.html?.v=8)
PR Newswire (Thu, Mar 8)
They ended up making about $20 M from the termination of the deal. Now they'll pursuit organic growth and look for other strategic acquisitions, as they couldn't possibly compete with Ericsson for Tandberg TV.
The following looks like a nice move:
• ARRIS Announces Opening of Major Research & Development Center in Shenzhen, China (http://biz.yahoo.com/prnews/070319/clm015.html?.v=78)
PR Newswire (Mon, Mar 19)
I believe there's a huge opportunity in China to deliver consumer goods and services, like cable TV, for example. ARRS is there now to help companies develop in this field.
Financially ARRS had pre-tax income of $107 M in 2006, which was its best year ever. Including tax benefits, EPS was $1.30, so the stock is trading at 10.3 times trailing earnings, which doesn't seem fair to me.
I'll continue holding ARRS.
When I look over the following table, comparing ARRS with its industry, I believe it looks clear how this stock is undervalued, even considering its low earnings multiple comes from a $37.37 M tax benefit in 2006:
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=34804;image)
I believe ARRS is positioning itself for maintaining a 30% average annual revenue growth, so I don't understand the low EPS estimates for 2007 and 2008:
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=34805;image)
Perhaps this has to do with tax charges or something like that, I'll have to dig further on the reasons why analysts are so pessimistic going forward (I say this because the company made $1.34 in 2006 EPS and analysts are estimating only $0.81 EPS for 2007, since if we exclude the tax benefit it would have still made $1.01 EPS in 2006. Why lower profits per share expected for 07 and 08?)
I'll keep holding ARRS.
>That means an average annual share price increase of:
>$1.46 B*(X^10) = $26 B <=> X = 33.4%
David,
I know you have mentioned the above formula for average share price increase. Could you please elaborate the formula and the factor and calculation goes into.
regards
QuoteDavid,
I know you have mentioned the above formula for average share price increase. Could you please elaborate the formula and the factor and calculation goes into.
regards
Sure, good question jos :)
Ok, the equation we have is:
$1.46 B*(X^10) = $26 B
(oops, I'm not sure the American math symbols are the same as in Europe, I guess they are since math is an universal language)
a) $1.46 B is the initial market cap
b) X is what we want to find out, the average annual rate of increase
c) 10 is the number of years of the estimate
d) $26 B is the final market cap, if the following assumptions are met:
d1) Revenue grows 31% a year for the next 10 years, as it grew in 2006
d2) Net profit margin remains at 12.3%
d3) The stock has a 16 times earnings multiple in 2017
Going back to the original equation and solving it step by step:
$1.46 B*(X^10) = $26 B <=> X^10 = ($26 B/$1.46 B) <=> X^10 = 17.81
<=> (X^10)^(1/10) = (17.81)^(1/10) <=> X = (17.81)^(0.1)
<=> X = 33.37%
Now, what we can discuss, probably with merit, is if these estimates aren't too optimistic. Because 31% average annual growth can be a long shot, just because it happened in 2006 it doesn't mean it will happen going forward. And maybe 12.6% net profit margin is too rich for ARRS's business.
You're right, I need to elaborate more on these assumptions, since other analysts are calling for lower numbers in 07 and 08 than in 06, I need to find out why.
In the meantime I'll keep holding ARRS, let me know if you have any further doubts.
Hi David -
Sorry to be nitpicky, but 17.81^0.1 is 1.3337, not .3337. To be correct here, the formula is 1.46 B*((X+1)^10) = 26 B.
Since X is the percentage increase per period (a year in this case) we need to add the 1 in there to add that percentage to for each of the periods we're considering...10.
What you've got down is this:
X = (17.81)^(0.1)
X = 1.3337, or 133.37%
Technically, it should be like this, 1.46 B*((X+1)^10) = 26 B, gives you
((X+1)^10) = 17.81
((X+1)^10)^(1/10) = 17.81^(1/10)
X+1 = 1.3337
X = .3337, or 33.37%
.derek :)
Quote from: dnickers on March 27, 2007, 05:54:17 AM
Hi David -
Sorry to be nitpicky, but 17.81^0.1 is 1.3337, not .3337. To be correct here, the formula is 1.46 B*((X+1)^10) = 26 B.
Since X is the percentage increase per period (a year in this case) we need to add the 1 in there to add that percentage to for each of the periods we're considering...10.
What you've got down is this:
X = (17.81)^(0.1)
X = 1.3337, or 133.37%
Technically, it should be like this, 1.46 B*((X+1)^10) = 26 B, gives you
((X+1)^10) = 17.81
((X+1)^10)^(1/10) = 17.81^(1/10)
X+1 = 1.3337
X = .3337, or 33.37%
.derek :)
Good point Derek, thanks for the correction :)
I missed that "1" but gave the same results using a "mental trick". Will use the correct math formula from now on.
Yesterday ARRS said when will it release Q1 results:
• ARRIS Announces First Quarter 2007 Earnings Release Date and Teleconference Details (http://biz.yahoo.com/bw/070327/20070327006170.html?.v=1)
Business Wire (Tue 1:20pm)
Analysts estimates call for $0.18 EPS on $235.13 M in revenues. We have time to study ARRS estimates for this quarter and beyond, I'll keep holding the stock.
I'm going to keep holding also, David. Stock is behaving very nicely through the market turmoil. Still appears to be a real bargain.
Telephony is the fastest growing cable provider service, my only concern is the heavily concentrated customer base- 4 largest cable cos. account for 68% of revs, with Comcast alone @ 39%.
Quote from: BigSully1 on March 28, 2007, 03:15:38 PM
I'm going to keep holding also, David. Stock is behaving very nicely through the market turmoil. Still appears to be a real bargain.
Telephony is the fastest growing cable provider service, my only concern is the heavily concentrated customer base- 4 largest cable cos. account for 68% of revs, with Comcast alone @ 39%.
Thanks for the valuable information BigSully1, I'll investigate it further for the next updates. Perhaps that costumer concentration is what is keeping the valuation low.
Yesterday's rise was due to changes in the S&P indices, so probably it won't last ...
«Standard & Poor's Announces Changes to U.S. Indices
Mar 27, 2007 6:57:00 PM
NEW YORK, March 27 /PRNewswire-FirstCall/ -- Standard & Poor's will make the following changes to the S&P 500, S&P MidCap 400, S&P SmallCap 600, and S&P REIT Composite indices:
-- S&P MidCap 400 constituent Abercrombie & Fitch Co. (NYSE: ANF) will
replace Univision Communications Inc. (NYSE: UVN) in the S&P 500, S&P
SmallCap 600 constituent Phillips-Van Heusen Corp. (NYSE: PVH) will
replace Abercrombie & Fitch in the S&P MidCap 400, and Blackbaud Inc.
(Nasdaq: BLKB) will replace Phillips-Van Heusen in the S&P SmallCap
600 after the close of trading on Wednesday, March 28. Univision is
being acquired by an investor group including Madison Dearborn
Partners, Providence Equity Partners, Texas Pacific Group, Thomas H.
Lee Partners and Saban Capital Group in a deal expected to close on or
about that date, pending final approvals.
-- S&P SmallCap 600 constituent NVR Inc. (Amex: NVR) will replace New
Plan Excel Realty Trust Inc. (NYSE: NXL) in the S&P MidCap 400,
Arris
Group Inc. (Nasdaq: ARRS) will replace NVR Inc. in the S&P SmallCap
600, and One Liberty Properties Inc. (NYSE: OLP) will replace New Plan
Excel Realty Trust in the S&P REIT Composite after the close of
trading on Wednesday, April 4. New Plan Excel Realty Trust is being
acquired by S&P Global 1200 constituent Centro Properties Group in a
deal expected to close on or about that date, pending final approvals.»
... but I hope it does :)
I'll keep holding ARRS.
As BigSully1 mentioned, concentration of revenues in a small and very important costumer base is one of the risk factors of an investment in ARRS:
«Our business has primarily come from several key customers. The loss of one of these customers or a significant reduction in sales to one of these customers would have a material adverse effect on our business.
Our four largest customers (including their affiliates, as applicable) are Comcast, Cox Communications, Liberty Media International, and Time Warner Cable. For the year ended December 31, 2006, sales to Comcast accounted for approximately 38.6%, sales to Cox Communications accounted for approximately 9.9%, sales to Liberty Media International accounted for approximately 10.0%, and sales to Time Warner Cable accounted for approximately 9.1% of our total revenue. The loss of any of these customers, or one of our other large customers, or a significant reduction in the products or services provided to any of them would have a material adverse impact on our business.
In addition, more so than historically, in recent years our customers have submitted their purchase orders less evenly over the course of each quarter and year and with shorter lead times. This has made it more difficult for us to forecast sales and plan accordingly.»
I can live with this risk and will keep holding ARRS, as the company is working to diversify its costumer base and geographic reach, with the opening of a research and development facility in China.
Analysts remain skeptical on ARRS, but the company has been beating estimates for the past few quarters:
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=35033;image)
It's nice to see the stock holding up well after the S&P index change news. I'll keep holding ARRS.
ARRS is a $1.52 B market cap company with $548 M in cash and marketable securities. In 2006 they received $11 M in interest for this cash hoard, but I guess they could find a better use for their money, through organic expansion or acquisitions. They tried Tandberg TV, but that one failed, because Ericsson wanted it too. But I'm sure there are other, perhaps less expensive, opportunities outthere. But, a lot of cash is always good in my opinion, it keeps possibilities open.
Technically the stock is holding up well, I think it is just a matter of time for it to go up to close the gap at $14.85 and breakout to new 7 year highs.
ARRS underperformed a bit today, rising just 0.64%, on nice volume of 2.6 million shares traded. ARRS is somewhat boring, isn't it? Its business is a bit hard to understand, they have some big costumers that account for significant chunks of their revenues, and they couldn't buy Tandberg TV.
If I had any better idea right now, probably I would let ARRS go, as my hands aren't as strong here as in other holdings. I prefer companies that sell to consumers, instead of selling to businesses. Anyway, I still believe it will outperform the general market over the long term, so I'll keep on holding ARRS.
If my data feed is correct, ARRS had a huge surge in volume before the close today. I am showing 7.875M total traded today. Could this be a bullish sign for tommorrow?
Quote from: BigSully1 on April 04, 2007, 04:10:39 PM
If my data feed is correct, ARRS had a huge surge in volume before the close today. I am showing 7.875M total traded today. Could this be a bullish sign for tommorrow?
Looks like it is correct. Yahoo now catching up. Volume surged by about 5M+ in last few minutes. INSTINET trade?
ARRS was added to the S&P Small Cap 600 after the close of trading today. Could that be the reason for the volume surge?
Quote from: kenmann on April 04, 2007, 05:21:20 PM
ARRS was added to the S&P Small Cap 600 after the close of trading today. Could that be the reason for the volume surge?
You're right, I keep forgetting that. Guess I'm getting a bit overly excited.
Quote from: BigSully1 on April 04, 2007, 05:28:56 PM
Quote from: kenmann on April 04, 2007, 05:21:20 PM
ARRS was added to the S&P Small Cap 600 after the close of trading today. Could that be the reason for the volume surge?
You're right, I keep forgetting that. Guess I'm getting a bit overly excited.
Yes, it was the S&P index change:
«S&P SmallCap 600 constituent NVR Inc. (Amex: NVR) will replace New Plan Excel Realty Trust Inc. (NYSE: NXL) in the S&P MidCap 400,
Arris Group Inc. (Nasdaq: ARRS) will replace NVR Inc. in the S&P SmallCap 600, and One Liberty Properties Inc. (NYSE: OLP) will replace New Plan Excel Realty Trust in the S&P REIT Composite
after the close of trading on Wednesday, April 4.»
Anyway, I don't think ARRS will go down after this, because the S&P SmallCap 600 tracker funds that bought ARRS won't be selling now. But even if it does, these are just short term phenomenons that have nothing to do with the final outcome of this trade.
I don't have time to do it now, but over the following updates I need to apply my new evaluation model to ARRS. I also need to find out why analysts are somewhat pessismistic about ARRS immediate future. Anyway, that pessimistic view is already priced in by the discount valuation the stock is trading when compared to its peers.
I'll keep holding ARRS.
QuoteI don't have time to do it now, but over the following updates I need to apply my new valuation model to ARRS.
Yes, let's do that, starting by the share count evolution graph:
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=35263;image)
Oops, this isn't nice at all, ARRS has a pro-dilution past. The share count CAGR since 1997 is 10.6%. And that explains how the stock price is down over the last ten year period (ARRS closed 1997 at $15.63), even though the market cap rose 155%, from $614 M to the current $1.567 B.
Even though recently the share count isn't rising as much as it did in the past, this graph shows ARRS's management disregard for shareholder's interests. This means they won't hesitate in diluting shareholder's value at the first sign of trouble.
With this information I'm thinking of taking 1.07 as the dilution factor, considering the historical share count CAGR but also the lower dilution rate over more recent years. I'll also take a look into the balance sheet over the next update to refine this estimate some more.
But today's update got me worried about this holding. I'll keep holding ARRS, for now.
Yesterday we had some positive news for ARRS:
• J:COM Taps ARRIS FlexPath(TM) Wideband Technology to Deliver 160 Mbps Internet service
PR Newswire (Mon 10:30am) (http://biz.yahoo.com/prnews/070409/clm021a.html?.v=2)
I enjoy the markets ARRS is involved and its geographical reach. It helps sustain a high revenue CAGR estimate.
Yesterday I was worried about historical dilution, and I still am, but I hope the balance sheet can abate those worries a bit:
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=35362;image)
Well, long term debt jumped to $276 M in 2006, and the current ratio declined to 2.42, still comfortably above the 2 minimum threshold. Cash & equivalents levels are quite high, at $549.2 M.
The balance sheet doesn't look weak to me, but not extremely strong either. Now I'm thinking I should put the cash + marketable securities, the receivables and inventory levels as a percentage of sales or market cap, perhaps that could improve this study. I'll think some more days about this slight change.
From what I'm seeing I'll maintain that quite high dilution factor of 1.07, because this management didn't show respect for shareholder's in the past.
Tomorrow we'll study historical revenue trends and the expected revenue for the future, so we can derive the revenue CAGR, the second variable of the model. Hopefully the stock will continue to move up as I study it :)
I'll continue holding ARRS.
Let's check ARRS's revenue trend:
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=35425;image)
The revenue CAGR since the low point of 2003 is 22.6%, but analysts are expecting growth of just 9.87% for 2008 and 7.19% for 2008. So I guess I shouldn't consider more than 15% revenue CAGR on my model, and probably that's optimistic. I'll use 12% or 1.12.
Gee, I'm getting worried about the quality of this pick, so let me check net profit margin right away:
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=35426;image)
The net profit margin in 2006 was about 16% but that was because of a one time tax benefit. Without it net profit margin would have been just 12%. Analysts expect about 9% net profit margin going forward and that's what I'll consider on my model too.
As for the EPS multiple estimate, the industry average is 24.6, so to be conservative I'll use 20.
Here are the results of the new valuation model:
(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=35429;image)
Oops, as I feared, the model says the expected share price CAGR is just 12.3% and the optimal selling price today is $13.33.
Hey, what you know, the stock closed yesterday at $14.69, so I have the chance of selling above the optimal selling price, with a 6.6% profit.
The trading plan is:
SELL ARRS
Update
http://biz.yahoo.com/ap/070425/earns_arris_group.html?.v=1
http://stockcharts.com/h-sc/ui?s=ARRS&p=D&b=5&g=0&id=p03354588331
QuoteHey, what you know, the stock closed yesterday at $14.69, so I have the chance of selling above the optimal selling price, with a 6.6% profit.
The trading plan is:
SELL ARRS
Looking back now I'm glad I sold ARRS at $14.7, since the stock closed at $5.5 on Friday, down 30% on the day after reporting disappointing results:
• ARRIS Announces Preliminary and Unaudited Fourth Quarter and Full Year 2007 Results (http://biz.yahoo.com/prnews/080214/clth085.html?.v=93)
PR Newswire (Thu, Feb 14)
«GAAP net income in the fourth quarter 2007 was $0.08 per diluted share, as compared to the fourth quarter 2006 of $0.64 per diluted share, and as compared to the third quarter 2007 of $0.25 per diluted share.»
«"While we continue to see robust demand from the majority of our customer base, we anticipate that sales to our largest customer will be lower. As a result, we now project that revenues for the Company in the first quarter 2008 will be in the range of $270 to $285 million with non-GAAP net income per diluted share in the range of $0.08 to $0.12 and GAAP net income per diluted share, in the range of $0.00 to $0.04.»
Possibly $0 EPS in Q2 2008 isn't good. ARRS seems to be sinking into losses ... then it may become a turnaround play, but it seems there's still some time and some downside to go before that.
I'll keep watching.
Anyone have any comments about ARRS. Resistance seems to be around 8.10
Quote from: Chainthroer on April 30, 2008, 12:50:39 PM
Anyone have any comments about ARRS. Resistance seems to be around 8.10
ARRS can be making an island pattern.
The news out was the following:
ARRIS Announces Preliminary and Unaudited First Quarter 2008 Results (http://biz.yahoo.com/prnews/080429/cltu117.html?.v=56)
PR Newswire (Tue 4:00pm)
There were 62 research or news reports published for ARRS today :o
Let me upload the following from Oppenheimer:
Solid Start, Looking for 2H08 Rebound