Great stocks on sale

Kiplinger's Personal Finance Magazine, Nov, 1998 by Manuel Schiffres

TELECOM TRAILBLAZERS

Deregulation of the phone industry has triggered an explosion of competition. The emergence of new companies and entirely new technologies, coupled with the stunning growth of the Internet, is fueling demand for phone gear. By some accounts, the size of the market for local phone equipment in the U.S. was $5 billion in 1997. That figure could hit $12 billion by 2000. And it is in this rapidly expanding sector of the telecom-equipment industry that ADC Telecommunications is making its mark.

ADC has come a long way since 1935, when it was founded as Audio Development Corp., a maker of jacks and plugs used in phone-company central offices. The company (612-938-8080) now manufactures an array of complex products used mainly by phone carriers to enhance their services. ADC's products help the phone companies boost the capacity of their networks to allow more efficient delivery of Internet, video, data and even plain old telephone service.

Oscar Castro, manager of Montgomery Global Communications fund, says ADC will benefit from the "incredible demand" for network capacity. That means strong demand for ADC's products, not only from existing phone companies but also from a new breed of service providers--known as competitive local exchange carriers--and even from cable-TV companies seeking to break in to the market. "ADC has a very broad product line, and it has established strong relations with customers," says Castro. "It has products for cable operators to carry telephony and for phone operators to carry data and video."

Oddly enough, one risk to ADC's otherwise bright prospects is the merger boom among telecom companies, says analyst Conrad Leifur of the Piper Jaffray brokerage. More than half of ADC's top 20 customers have recently been bought or are in the process of being acquired, he notes. Those acquisitions may disrupt capital-spending plans in the short term. ADC also expects about one-fourth of its revenues this year to come from foreign markets, with 5% from Southeast Asia.

Analysts expect earnings per share of $1.08 for the fiscal year ending in October. That represents a jump of just 15% over the 1997 figure. But analysts predict much better growth, to $1.36 per share (up 26%) for the October 1999 year, and a longer-term growth rate of 30% a year.

While companies such as ADC provide equipment that plugs into phone lines, the phone lines themselves continue to be a growth business. Although cellular and other forms of wireless communications tend to get most of the attention, the wired world has also seen some exciting growth. Qwest Communications (303-291-1400) has one of the newest and highest-capacity fiber-optic networks.

Qwest got its start in 1988, when the Southern Pacific railroad decided to plant fiber-optic cables along its rights of way. Today routes covering 8,800 miles from Los Angeles to New York City are in place, and by mid 1999 the company will expand its network to 18,400 miles, connecting 130 cities from coast to coast. That's enough capacity to carry about 80% of domestic long-distance traffic at the speed of light.