Telco’s Comeback Kid
Cramer likes to find companies in the sweet spot of an industry. Usually, that’s what leads to revenues, profits and growth. And as he always says, growth is like crack on Wall Street. Traders are addicted to it, and it pushes stocks higher and higher.
Well, Tekelec has a front-row seat for the switch in telecommunications to next-generation networks. TKLC makes the signaling products for these networks and owns 80% of the North American market and 40% worldwide. It’s a risky pick – hence the Friday highlight – but there are a few reasons Cramer talked about it.
Management at Tekelec has been hard at work tightening up the fundamentals. Cost savings and fat trimming are primary concerns, and that was apparent with the sale of the company’s switching business (not signaling), which wasn’t very profitable. The hard work paid off: TKLC beat the latest quarter by 6 cents a share.
Unlike a lot of other speculative names, Tekelec has some money to throw around. The telco equipment maker is just about done with a $50 million buyback, which means it isn’t exactly struggling to survive.
Cramer likes the newer products, too, such as Tekcore. This device attaches to a server and allows a telco company the same kind of services it would get from a whole network. So, Tekcore is less expensive and more efficient.
There could be some nice growth when Tekelec’s local number portability goes global. This is the service that allows a person to carry their number from carrier to carrier. It’s mainly a U.S. feature right now, but it’s starting to gain traction in Brazil, India, China and Mexico.
A breakdown of the multiple shows Tekelec to be cheap. The stock trades at 18 times next year’s numbers, or 1.2 times its growth rate. Cramer thinks it’s worth 1.5 times the growth rate, which would make this $13 stock worth $16, or 22% more.
Probably the biggest risk is that Cisco Systems also does business in this space. And it integrates its signaling products into its switches, while Tekelec is a standalone signal company that works with switches made by others. Then there’s telecom as a whole, which is always lumpy. So Cramer doesn’t think TKLC will ever be a stock for the long haul.
But a couple more strong quarters might make Tekelec too hard to resist for a larger telco equipment supplier. So while TKLC is risky, Cramer thinks the company and the stock are headed in the right direction.
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