Ceragon Purchase Boosts Takeover Potential

Wednesday it was announced that Ceragon Networks (NASDAQ: CRNT) has reached an agreement to acquire Nera Networks of Norway.  Both are in the backhaul sector of the wireless business.  As frequent readers know, I have long been a bull on Ceragon for a number of reasons:

  • Large customer base and high growth
  • Low cost structure
  • Excellent management team
  • Outstanding market niche

As mobile networks grow, the interconnections between towers and switching hubs (backhaul) requires faster and faster connections.  Putting in microwave solutions such as those Ceragon (and Nera) provide is signficantly cheaper than replacing pokey copper T-1’s with optical fiber.  And in the parts of the world where growth is fastest (China, India, etc.) there isn’t even any copper to replace.  Moreover, in many regions (e.g Africa, South America) the topology precludes wired backhaul.

Ceragon, with its roots in the Israeli military, has long been the technology leader in this segment.  The addition of Nera’s complementary product line and customer set (particularly in South America) will provide a significant boost to its prospects.  It also reduces reliance on Nokia-Siemens, Ceragon’s biggest customer.

But the biggest advantage coming from this consolidation is that it will ultimately make Ceragon a much more attractive takeover candidate than it already is.  Potential acquirers are the large, diversified telecoms like Alcatel-Lucent, Nokia-Siemens, NEC, or Ericsson.

This has been a long-term buy-and-hold recommendation of mine for years, and that’s even more so now (though I’d probably wait a quarter or two for a lower price as Ceragon absorbs some losses from the acquisition and rationalizes Nera’s cost structure).

I would expect it’s even more likely to see Ceragon taken out itself, perhaps within 2 years or so.  I plan on holding shares when it is.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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January 20, 2011 at 4:30 pm Leave a comment

The Ship is Sinking

Well, you can’t say I didn’t see this one coming.

Recently I noted how badly Clearwire’s numbers looked (NASDAQ: CLWR).  But long before that, I made the point that WiMax was overhyped and that founder Craig McCaw had a history of building up large wireless enterprises and exiting at the top–with as much coin as possible.

I got flamed from many for both opinions, largely from non-technologists who seemed more in love with their portfolio than they were well-versed in wireless telecom.

Today it was announced McCaw is practically sneaking out the back door, right after CLWR announced large layoffs amid doubts about its survival, and more important, right after a large $1.1B debt offering.

The smartest rat seems to have just jumped overboard.

Anybody wanna buy a deck chair on this puppy?

Disclosure: I hold no position, either long or short, in any stocks mentioned here.


December 31, 2010 at 6:35 pm Leave a comment

Location, Location, Location

Location, location, location.  That’s the mantra of what drives value in the real estate industry.  However, the modern version might well be, “Location, just less of it.”

Today, Barnes & Noble (NYSE: BKS) announced it is putting itself on the block, looking for a buyer as it struggles to survive in a world of digital books.

[Frankly, I’m not so sure it’s digital books that are causing the problem so much as online purchases.  Certainly, digital books are growing wildly, but off of a very small base–according to Publisher’s Weekly, they amount to only about 1% of the market.  So maybe not a short-term catastrophe, though it’s certainly a future threat.]

Either way, the problem with Barnes & Noble is real estate.   One of the key ratios by which they are measured is return on assets–and with their large number of expensive stores, the fewer pricey books they sell, the more the operating metrics plummet.   It’s almost like reverse leverage.

For years now, booksellers have sought other means to drive traffic into their retail outlets, peddling music and videos, opening in-store cafes, offering reading areas, etc.  All to generate a higher return on their store  “assets”.

I have this strange feeling of deja vu.

Blockbuster (BLOKA.PK) now trades on the Pink Sheets  for exactly the same reason.  They too were fixated on driving traffic to their stores.  They too operated under the assumption that their true competitive advantage was their locations, and they had to keep earning a return on those assets.  This caused them to make some rather odd decisions, such as enticing people to drive to their stores just to fill up a media player with movies to take home.  Meanwhile, Netflix ate their lunch shipping discs (and now simply bits) directly to customers.

Similarly, Amazon (and others) killed Toys R Us, who had a similar problem with too much real estate and the accompanying high overhead.  Why drive your car to the crowded store (along with acquisitive children badgering you for every bright and shiny thing they see) when you could have Christmas delivered to your door?  And cheaper too.

It’s really a shame, as I still enjoy browsing in bookstores. Checking up on favorite writers to see if they have something new.  Finding an unfamiliar author to take a chance on.  But there’s no question they are struggling.

Probably some private equity firm will buy Barnes & Noble, and turn it around, as was the case with Toys R Us.  Perhaps even Blockbuster will survive.  Stranger things have happened.  However, one thing is for sure:

There will be a lot fewer locations.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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August 4, 2010 at 8:47 am 36 comments

Can You Spell “Vindication”?

I was just reviewing one of my predictions about the Wireless space from some months ago.  I took a lot of flack from some readers at Seeking Alpha for my suggestion that Clearwire (NASDAQ: CLWR) had issues, and that Dragonwave (NASDAQ: DRWI) had risen a bit too fast.

Yet over that period, the S&P has dropped about 8%, while CLWR has fallen more than double that amount.

Moreover, there were those that scoffed at my idea of a pair trade on the equipment suppliers:  buy Ceragon Networks (NASDAQ: CRNT) and sell Dragonwave.  It’s pleasing to note, however, that had any of them done so, there would have been a nice little pot of gold at the end of the rainbow.

Ceragon has lost 32% over the period, but that pales in comparison to DRWI’s drop of 47%.

Each time I’ve suggested Ceragon is a solid company with a bright future in a growing space, people have pooh-poohed the suggestion–for one reason or another.

I may be wrong someday but I’m still waiting.  In the meantime, vindication sure feels good.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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July 22, 2010 at 9:08 am 1 comment

They Shoot Horses, Don’t They?

Reading with interest this morning all the analysis about the newly passed Financial Reform bill.  Or as Harvey Pitt called it, “The Lawyers and Consultants Full Employment Act of 2010.”

Aside from it appearing to be the usual mess that all these omnibus bills inevitably end up becoming, I was struck by the following image.

It’s as if Congress had decided the best way to prevent future problems is to leave the barn door open, and instead surround the building with a make-shift, split-rail fence.

Long after all the horses have escaped, naturally.

Oh, and they knocked down the barn, too.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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July 16, 2010 at 9:11 am Leave a comment

Alpha Bits

Alan Reynolds has an op-ed out this morning in the Wall Street Journal chastising those who believe poor job growth is driving us into a double dip recession–the so-called “W” pattern.  It seems Reynolds would have us believe that our economy is more like a “U” (or, dare I suggest, a “V”?).   And that as a result Keynesian efforts to keep supporting the economy are not needed.

It’s well researched and well written, and argues persuasively that–properly interpreted–recent jobs numbers aren’t all that bad, amounting to a net gain this year of roughly 100,000  private sector jobs per month.  (It’s about double that if you add in government jobs, some of which are temporary).  I even agree we need to be careful with the fiscal magic wand, at least absent a long-term strategy for handling the deficit, as Bernanke suggested yesterday.

However, for all his hair-splitting, Reynolds seems to miss the point.

Recent estimates indicate more than 8 million jobs were lost during the panic and Great Recession.  In a nice, steady expansion (3-5% annual GDP growth), let’s say the economy adds maybe 300-350,000 jobs per month.  At that rate it will take 24 months just to get back to where we were beforehand, employment-wise.  And at only 100,000 jobs per month this year, we haven’t really started the clock yet.

Imagine.  Two years just to catch up.

Even worse, we’re not counting the growth in the labor force since 2008 (young people coming of age minus those retiring).  Plus fewer than expected can afford to retire now, given how their savings have been decimated in recent years.

Then there’s the economy.  Yes, there have been impressive gains over the last year or so.  Always stated breathlessly by the popular and financial press, in terms of double-digit percentage growth.  Little mention of the drastically low base that growth is from.  In fact, frightfully few actual numbers at all.  Just growth percentages.  No indication of how far we still are from the level of economic prosperity we enjoyed in 2006 or 2007.

[Some of that growth, by the way, has come from temporary fixes–namely government stimulus.  The rest has been due to industry overproducing to rebuild inventories, after running the pipeline dry when few were buying.  In the old days we called that stuffing the channel.  Now we refer to it as a rebounding economy.]

Further, there are all the references to growing corporate profits.  Sure, if you lay off lots of people and lower costs, then even with falling sales you can engineer rising profits.  But that can’t last without an increase in demand.  And that requires workers with salaries, as well as currently employed people with rising incomes.

What we’ve seen so far has been more akin to a relief rally in sales than a true demand increase.  People who had been holding their breath finally buying that refrigerator or car once they realize they won’t be losing their job.  But flooding the economy with cheap money, as the government has done, is ineffective in an environment of low demand and fear over jobs and savings.

It’s like pushing a rope.

Until there is unequivocal evidence that people feel confident enough to really start buying again, small businesses–the engine of job creation–won’t hire.  Nor will banks lend to them.  It doesn’t matter how cheap money is, no one will risk lending to a business that can’t demonstrate demand.  Despite the rise in the market over the last year, banks aren’t lending, which shows you what they really think.

Bottom line, with vastly lower employment, lower (and slowly rising) housing prices, a drop in equity wealth, a rise in the savings rate, and massive consumer deleveraging, its difficult to conceive of a way we can get our economy back to pre 2008 levels in anything less than 4 or 5 years, perhaps more.  If we do, it will only be because consumers are going into debt again, simply postponing the inevitable.  Or as I’ve discussed before, re-inflating the bubble.

So is the economy headed for a double dip (“W”)?  Perhaps, but not likely.  Frankly, I suspect it’s more like a “square root” symbol–sharp fall, then a small rise, then flat.  But no matter which you believe, what is clear, and most relevant,  is that the recovery is not a “V” or even a “U”.

Yet that’s exactly what the market has priced in over the last year.

There’s no doubt we’ve had an impressive bull run in the market since March 2009.  However, the cracks are showing.  It’s been clear to me for some time that the market has gotten ahead of itself, and that this is one of those times where the market and economy have become disassociated.  Until recently, the pundits have all been saying that we can’t be at a market top, because there’s still too much money on the sidelines, and we don’t have a top until all that money rushes in.

They underestimate the uncertainty that still grips many on Main Street.  People have been keeping a lot of their funds in cash or safe bonds because they no longer trust the market.

Really, what I think was happening up until the “flash crash” is that money managers have been talking their book.  Waiting for the suckers to come in at the last minute so they could sell at the top.  Except the suckers didn’t come, and with all the new fear and volatility introduced by Europe’s problems, they aren’t going to.  Which is why there’s been so much selling lately, and why I believe this is more than a simple correction in a continuing bull market.

We’ve been in a secular (long-term) bear market since 2000, and there’s no sign we’ll be out of it soon.  Not until we get the economy back to prior levels–which as we’ve seen will take awhile.  We may be at the end of the cyclical bull market that began last March, and could experience one or more short-term bears and bulls before we finally pull out of all this.

In fact, in hindsight it appears as if the rapid rise in the market from March 2009 to July 2009 was the “relief rally” that compensated for the panic of late ’08, while the rise since last July was the real “bull” market.  If so, there’s even a small chance we’ll be revisiting those July lows before we see another sustained rise.

In any case, the part of the alphabet we assign to the economy isn’t the real issue right now.  It’s the “W” in the stock market that we ought to be worrying about.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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June 10, 2010 at 10:46 am 2 comments

Wow. Just…Wow.

I cannot describe the mix of emotions I experienced this morning as I read about Craig Venter’s latest accomplishment.  Awe, excitement, fear, envy, abject terror, you name it.

Venter’s crew has created a self-replicating life form with a designed genome.

Whether you believe it is “a turning point in the relationship between man and nature” or that “he has not created life, only mimicked it,” this is a watershed moment in my view.  I admit I’m being a bit breathless here.  Perhaps this is nothing new or exciting for those steeped in the biological sciences.  But it is the first time the true potential for biotech is becoming clear for me.

If you want a career path that will put your children in the center of high-tech business in 20 years (and all business is, or will be, high-tech), then get them prepped for synthetic biology.

Venter’s team took a pre-sequenced genetic code from an existing bacterium,  made several changes to the sequences in a computer, then synthesized the resulting digital code into chemical DNA.  Finally, that DNA was inserted into another bacteria that had been emptied of genetic material.  The new DNA “took over” the bacterium, and demonstrated the capability to make copies of itself.

This is just too cool for words.

I will largely leave the ethical issues for others to debate.  Such issues are important and weighty, to be sure.  I’m just not equipped to wrestle with them.

Many of you, like me, think patenting naturally occurring, individual genes is, well, somewhat dubious.  But this is very different,  since something new is being created.  In fact, some of the DNA sequences that were inserted are coded versions of the names of Venter and his researchers.  (They also included quotations from James Joyce and others.)  Definitely hard not to see that as patentable.

[Years ago Carl Sagan wrote a novel called Contact. In the book, scientists discovered that when calculated out to enough digits, the transcendental number pi contained a message.  While technically kind of silly, it was still a thought-provoking idea.  Signing life forms is nearly this mind-blowing.]

Certainly, they have not yet created life out of whole cloth.  In effect, Venter has taken a painting, erased a few things, added some brush-strokes, and signed it at the bottom.  Hardly the same as painting the Mona Lisa from scratch.  And clearly years of work needs to be done.    Still, the commercial potential for this over the next 20, 50, 100 years is incalculable.

(Of course, the danger is that now we might not be here in 100 years.)

There may be ways to synthesize biofuels, plastics, chemicals, drugs, etc.  And not by dinking around with existing genes, but by creating entirely new ones.   Of course, that only covers materials synthesis.  What about biological machines?  Colonies of oil-eating organisms? Neural networks? Intelligence?  This is biotech cubed.

Bacteria are now truly poised to become the microchips and chemical labs of the 21st century.

Disclosure: I hold no position, either long or short, in any stocks mentioned here.

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May 21, 2010 at 9:39 am 2 comments

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