SCMR

[David Randolph]

I made some due diligence on SCMR and was very pleased by it. Both on a technical and fundamental analysis the stock looks to be very attractive at this point:

«SCMR rose $1, or 26%, the last couple of weeks. The rise was made with abnormally high volume:



Now that the stock had a 5% pullback, probably on profit taking, I want to take a look at some fundamental trends within the company:

Revenues:



I see steady revenue growth since 2003.

Earnings Per Share (EPS):



EPS has been improving since 2002 and the company just turned profitable.

Gross Margins:



Gross margins, altough declining a bit since 2003, are still pretty stable above 50%.

Net Profit Margins:



Net margins improving since 2002 and the company just turned profitable with an awesome 25% net profit margin.

Debt:



The company is almost free of debt at this point, with total liabilities of just $41M. If we think the company has cash and marketable securities of $955M we find that debt is almost negligible at SCMR.

Cash + Marketable Securities



The company has a very strong balance sheet at this point, again, with $955M in cash.

If we take out debt of this cash balance we get $914M. Now thinking the market cap is $1.33B we get to the astonishing conclusion that 68.7% of SCMR's market cap is cash. It means $3.3 of cash per share.

This happens because the company was losing money every quarter, so investors were always worried that someday the cash could start to run out. But not anymore, the company just turned profitable, so this cash level won't disappear, probably it will grow even more !

A negative is that the sales multiple is 12.2, compared with an industry average of 1.98. But revenue growth this last quarter, in comparison with the same period last year, was 92% compared with 12.6% for the industry.

All in all I consider the last quarter from the company as very significant (because it doesn't look to be a one time event, it derives from a long term path to profitability) and this will mean a PPS rise of much more than 26%.

I believe SCMR stock needs to rise beyond the 2004 high of $6.52 to reflect the current change in fundamentals.

»

I'll buy SCMR around today's open for the 3 Stocks on Fire Portfolio, 6.66% of capital as usual.

[David Randolph]

SCMR is holding just above the midpoint of the last long white marubozu, hopefully preparing itself for a shot to new highs. I expect that, given my initial analysis, and I'll continue holding whatever happens today.

[David Randolph]

Look at the volume and price picking up again on SCMR  Everything is set for a push to new highs, sit and watch.

[David Randolph]

Nice white candle on Friday for SCMR 

I said this: «I believe SCMR stock needs to rise beyond the 2004 high of $6.52 to reflect the current change in fundamentals.»

I have no motive to change this view on SCMR, therefore I'll continue holding.

[David Randolph]

SCMR has attractive fundamentals and the technical trend is bullish. I want to continue holding this stock even if the general market declines. Perhaps I'll hedge this position with a weaker competitor, as I did with SIFY.

I'll study more on this subject for the next update, for now I'll continue holding SCMR.

[CharlesBKK]

HI David:

Not sure if you know, but after the bell yesterday, SCMR was downgraded by Smith Barney. Unfortunately, I dont have the details, but SCMR is down over 6% (about .30) pre-market.

Rgds,

Charles

[CharlesBKK]

SCMR: Recent Share Appreciation Unwarranted -- Downgrading To Sell

Smith Barney

SUMMARY                                         
* Downgrading SCMR to Sell.  Adjusting target to
$4.10 based on 2.25x EV/S.
                     
*Following Sycamore's FY1Q '06 (Oct.)         
earnings report on Nov. 29th, the stock has   
appreciated over 30% and is now trading at   
5.2x EV to CY '06 sales, which is the highest
EV to Sales multiple in our entire coverage universe.
                                     
* The 48% seq. growth in revs in FY1Q was       
driven by a large deployment at a new customer
  (KT) and geographic expansion with an existing
customer (Vodafone).  We estimate ~50% of the
Qs sales came from these customers.         

* We do not see any similarly sized             
  deployments in the pipeline and revenues are 
likely to be subject to decline in near-term 
   and lumpiness thereafter. Mgmt did not offer 
guidance. We think the risks to Street       
  estimates are high.                           

* Sycamore sells a single product with a       
limited market and has roughly five meaningful
customers. Optical switch market is           
characterized by long sales cycles and       
  Sycamore competes with much larger, well     
entrenched incumbents.             

[David Randolph]

I wasn't aware of this downgrade CharlesBKK, thanks 

The stock will open with a gap down on a medium term ascending trend. Is this gap down a selling or buying opportunity? Considering SCMR has $3.3 per share of free of debt cash and fundamentals are improving (despite what Smith Barney says), I think longer term today's lower open will be seen as a buying opportunity instead of a selling one.

Anyway, short term the stock will be pressured by this downgrade. I seldom act on brokerage and analyst's calls.

But thanks for the valuable info CharlesBkk (applaud) !

[David Randolph]

Yes, it looks like people who sold that open at $4.45 are already losing money. The stock is coming back after that biassed downgrade - perhaps someone important missed the run up and needed the opportunity to get in at cheaper prices.

I'll continue holding SCMR based on my fundamental and technical analysis, there's not much downside risk at this point, the risk is on the upside.

[David Randolph]

Here's a transcript of the full article downgrading SCMR (after all it was CitiGroup, not Smith Barney, who downgraded it):

«By Erica Owen
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Shares of Sycamore Networks Inc. (SCMR) dropped as much as 11.6% Tuesday after Citigroup downgraded the optical-network-equipment company on its stock's overvaluation and thin revenue prospects. Despite its grim forecast and sell rating, Citigroup raised Sycamore's price target.

"Since reporting strong FY1Q 2006 results in late November, shares of SCMR have appreciated more than 30% to nearly $5 per share," said Citigroup analyst B. Alexander Henderson, who cut the Chelmsford, Mass., company to sell from hold. "Based on our analysis of Sycamore's quarter and, more importantly, its business prospects, we believe the stock is considerably overvalued at current levels."

Shares of Sycamore, which develops and markets optical-networking products for telecommunications service providers worldwide, were recently down 8.3%, or 40 cents, to $4.41 on volume of 4 million, up from its average volume of 1.6 million.

Sycamore's stock is trading down from its 52-week high of $5.05, which it marked on Dec. 9, and above its 52-week low of $3.18, hit on May 17.

Citigroup's downgrade Tuesday is another negative in Sycamore's long-drawn-out fall from grace. A Wall Street darling at its initial public offering, Sycamore debuted on the Nasdaq in October 1999 at $270, closing its first day of trading at $184.75, a 386% premium to its offering price of $38 a share.

Since then, the company has been plagued with problems, most recently Nasdaq's June warning that Sycamore's stock would be delisted after failing to file its quarterly report on time because of a Securities and Exchange Commission accounting investigation.

Henderson said his downgrade is based on several factors, including Sycamore's most recent first-quarter period, when the company reported a 48% revenue spike that sent the stock climbing.

Henderson warns the revenue gain is a one-off and sees nothing in the company's pipeline that supports the view that Sycamore will repeat the quarter's success near-term. Furthermore, the company offered no specific second-quarter guidance except to warn that future quarters would be "lumpy."

"Unfortunately, the sales cycle on new customer wins is extremely long, and we don't currently see any significant optical switch RFPs likely to turn into near-term revenues for which Sycamore is the favorite," said Henderson, who expects second-quarter sales to drop 30% sequentially to below $20 million. "While a new customer win would likely close the gap between Sycamore's revenues and consensus expectations and potentially lead to upside, we remind investors that Sycamore has averaged less than one new win per year over the past several years."

In addition, Henderson points to a limited market for Sycamore's single product line in the core optical switch market, which he estimates to be around $420 million in 2005.

"Sycamore looks to be the #4 market share player with about 11% share," Henderson said. "Sycamore's goal is to drive the integration of intelligence into the optical transport arena that should improve the competitive capabilities of its carrier customers - we are long-term believers in this strategy, however, near-term realities of service provider expenditure cuts and equipment order delays have caused Sycamore to suffer."

Regardless, Henderson boosted his price target to $4.10 from $3.75, based on decreasing chances the company would shut it doors.

"We believe it is considerably less likely the company simply shuts the door and returns the cash," Henderson said. "A take-out by a larger vendor remains a possibility and could potentially be executed at near the current market price of $5 per share.

"However, we consider this unlikely given our belief that Sycamore has been 'for sale' for several years, and there have been no takers," Henderson said.

Citigroup makes a market in Sycamore shares.

(END) Dow Jones Newswires

December 20, 2005 12:19 ET (17:19 GMT)»

The analyst talks about the recent quarter as an isolated «revenue spike». But that's not what I see in the historical revenue trends of the company:



Revenues are growing YoY for the past 4 years. So don't come out and say «there's no revenue growth, only on spikes», ok?

As said, the company has $3.3 in free of debt cash per share, so risks are all on the upside.

Maybe the downgrade had something to do with this: «Citigroup makes a market in Sycamore shares.» They might have been caught up short in this and needed to cover it with not so much damage.

The stock is coming back to fill the downgrade gap, I'll continue holding SCMR.
 

[ScottishTrader]

Agreed.  A 15 minute chart shows an ascending triangle forming since the gap down that is ready to break to the upside, back into the gap.  Yesterday's movement in the afternoon was strong, and I think it is ready to push upwards again. 

[David Randolph]

It looks more and more the following is the truth:

Maybe the downgrade had something to do with this: «Citigroup makes a market in Sycamore shares.» They might have been caught up short in this and needed to cover it with not so much damage.

Citigroup's analyst projections call for $20M in revenues for the current quarter, down from $27M. But, $20M in revenues would still be the 2nd best over the last 17 quarters.

Even bears must agree that fundamental trends on SCMR are improving. I'll continue holding the stock.

[422fwhp]

Gave up all the previous day's gains but still above TL1.  Year end cash out?

Holding, Jody.

[David Randolph]

Gave up all the previous day's gains but still above TL1.  Year end cash out?

Holding, Jody.

SCMR closed the gap at $4.79 and then a sell off began. I'm in doubt here. I feel the market turning bearish (and there's plenty of fundamental evidence the bear move is just starting - we'll talk about it on another place), but SCMR has $3.3 per share of free of debt cash, so there isn't all that much risk holding the stock at this point.

The risk seems to be on the upside.

If there is one stock I would like to own in not so good economic times, that stock is SCMR, provided that the company doesn't start burning its cash pile.

I'll continue holding SCMR.

[David Randolph]

Nothing new on SCMR, not on the fundamental or technical side, I'll continue holding the stock for the foreseeable future. I plan to hold 5 stocks long when the new year begins, and SCMR will be one of those.