Reading material from the Globe and Mail....Ingram: Sierra flies close to the sun
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MATHEW INGRAM
Monday, April 19, 2004
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Not that long ago, Richmond, B.C.-based Sierra Wireless suffered from a general lack of attention on the part of most investors — which isn't that surprising, as a relatively small maker of wireless cards for laptops and handheld devices. In the fuss over companies such as Research In Motion and Linksys (which was bought last year by networking giant Cisco Systems), Sierra often got overlooked. That isn't the case any more, however: the stock has climbed by more than 850 per cent in the past year and 150 per cent since January.
Now, Sierra's problem — if it has one — is that it is being looked over almost too much, by investors hunting for a stock on a hot streak. That kind of pressure takes its toll. On Monday, for example, Sierra released its first-quarter results, and they met or exceeded the targets of virtually all the Wall Street and Bay Street analysts who follow the company. Sales more than doubled and profit per share rose by almost 10 times. So what did the stock do? It fell by more than $10 or about 18 per cent on heavy volume, to close at $46.
Like many other high-flying technology stocks such as RIM (which has climbed by 600 per cent in the past year, and 150 per cent in the past six months) Sierra is suffering from the "buy on rumour, sell on fact" phenomenon. Even though the company's profit of 13 cents (U.S.) a share — excluding various one-time items — was more than it earned through all of last year, investors had already built all that and more into the share price. For many tech stocks, the so-called "whisper number" has returned: a common occurrence in the late 1990s, in which the rumour mill pushes profit and sales estimates even higher than those of the analysts who follow the company.
For Sierra, the issue now is whether it can continue to produce the kind of growth that will justify the levels its stock is trading at. Based on the company's profit per share over the past 12 months, the stock is trading at more than 300 times earnings — but using the latest estimates from Thomson First Call for next year's profit, it is selling for a much more reasonable 34 times earnings. That's because analysts are forecasting that Sierra's profit will more than quadruple from last year's $2.4-million or 12 cents a share to 69 cents a share, and that it will climb by another 40 per cent or so to more than $1 in 2005. They see sales rising 80 per cent this year to $187-million and climbing another 25 per cent in 2005.
To say these goals are ambitious would be understating things just a tad. In fact, part of the reason Sierra Wireless was overlooked until recently was that its financial performance was nothing to write home about. In 2002, the company lost $41-million or $2.56 per share (on sales of $77-million), and the year before it lost $24-million or $1.50 a share. Much of those losses were the result of restructuring costs, as Sierra tried to find a business model that was consistently profitable.
It appears to have found one, in part because of last year's acquisition of AirPrime — a competing maker of wireless cards — and also because the company has moved much of its manufacturing to Mexico, which has reduced costs. The takeover of AirPrime broadened Sierra's reach in the market, and brought in a major customer in Sprint, one of AirPrime's main clients. Sierra is now the leading maker of wireless cards that use the CDMA (code division multiple access) standard, which many leading North American telecom services are based on. Some analysts say the company is less well positioned in GSM (global system for mobile communications) technology, however, which is the European standard.
The potential for Sierra (and other card makers such as Novatel Wireless, Linksys and Sony Ericsson) is definitely attractive. In an attempt to drive their revenue upward, telecom carriers such as Sprint and Verizon in the U.S. are pushing higher-speed cellular networks using the next-generation versions of CDMA and GSM, to allow users to connect their laptops and handhelds at high speeds wherever they are. In addition to being Sprint's main provider, Sierra also supplies CDMA wireless hardware used in the Treo 600 cellphone/PDA from PalmOne — an arrangement it inherited when it acquired AirPrime.
Some caveats remain, however. For example, some analysts have pointed out that Sierra's GSM products are facing stiff competition, and that both Rogers Wireless and AT&T Wireless are bundling cards from Sony Ericsson with their latest high-speed wireless services. Another question mark is the fact that Sierra is coming to market soon with its own cellphone/PDA combo, called the Voq — a phone with a flip-out keypad — which will compete with Palm's Treo, as well as RIM's BlackBerry. Some feel that could jeopardize the company's business with PalmOne and possibly others, as well as distracting Sierra from its main business with potentially costly consequences.
One thing is clear: investors have built extremely high hopes into Sierra's share price. As the company is now discovering, that can be both a blessing and a curse.