Shares digital

Spirent Communications (SPT) – 62p, stop loss 50p

SHARES SUMMARY

It’s hard to find top notch companies with a commanding slice of their sector market on such low ratings. Spirent fills the bill and the shares should top 80p by Christmas.

Business:

Provides the test solutions, equipment and training for telecommunications companies to test their latest technologies

Vital stats:

Market value: £470 million

Historic PE 2007: 17.2

Prospective PE 2008: 10.7

Prospective PE 2009: 8.5

Sector PE: 12

1-month relative strength: 25.7%

1-year relative strength: 14%

Yield: n/a

NMS: 10,000

Spread: 0.4%

Spirent has undergone something of a internal revolution. Some critics say about time, as the company has been listed since 1967, slumped to losses in 2005 and its shares peaked at over 600p in 2000.

It might be a bit early to herald a new dawn for Spirent but there is a good chance. In any case the shares look cheap for a company that is in the top division of its sector, with broker Panmure Gordon forecasting profits trebling to over £50 million this year and hitting £65 million in 2009. This would slash the PE to a miserly 8.5.

Admittedly there is no dividend, though the company has ‘returned’ £75 million last year through share buybacks. It would be nice if chairman Edward Bramson and non-executive director Gerard Eastman, who together own 34% of Spirent, rewarded private investors with a return to dividend payments (the last was in since 2002) from the growing cash pile.

Net cash jumped to £79 million last year despite the buybacks and will easily top £100 million this year, or over a fifth of Spirent’s market value.

This massive cash generation is a great plus point for Spirent, along with its leading technologies and strong market position.

Last year’s restructuring and cost cutting followed poor performances in 2005 and 2006. Also telecom company orders dried up for a while after the huge 3G splurge. Annual cost savings of £29 million have been achieved against a target of £21.5 million.

Even better, Spirent is not only leaner and meaner it is also more efficient and competitive. New products are being developed and delivered faster. Stock turn has been slashed from 3.7-times to 2.6-times for performance analysis testing equipment.

Telecom companies are doing better than some analysts expected, and crucially are having to compete harder to win customers with new services and higher quality services. This means spending more on testing them to ensure they are working properly.

Spirent’s new flagship test product TestCenterTM 2.0 increased its customer base from 200 to 340 in 2007. Other applications being addressed include IPTV, wireless services, IMS and testing increased entertainment content with integrated voice services.

In other words, the company is in a great place. More and more of our information, entertainment and communications will be piped through mobile devices such as the iPhone as well as static devices like PCs and TVs.

Just over 70% of Spirent’s business is in this sector with less-successful service assurance and systems businesses making up the balance. Some analysts would not be surprised to see these operations sold at some point.

Performance analysis orders are much higher and Bramson is confident about the future with a range of new products, improved manufacturing processes and a clearer focus on key growth areas.

by: Timon Day