3SOF

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)

3. Technical Analysis
3.1. All History Chart



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



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



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



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
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



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



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



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
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.


Oliver

Actually ARRS was the 1st profitable trade you made on 3SOF: http://www.3stocksonfire.org/closed_trades.php, how could you forget? 

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  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? 

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  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? 

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  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

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, 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 (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
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.