Company Spotlight - Harmonic (Nasdaq:HLIT)

  What A Ride

January 7, 2008 - Harmonic, Inc. (HLIT-Nasdaq) is a manufacturer of fiber optic and wireless network transmission products used to enable Internet access and video-on-demand services. The company's broadband network access equipment includes multiplexers, optical nodes, transmitters, and optical amplifiers.

What can you say about a stock that goes from $157.50 to $1 in 2 years?  The first thing is: Be Careful.  This is one wild roller coaster if you get on it.

The stock took a drubbing in 2001 and 2002 because earnings went from 76 cents a share in 1999 to a negative $4.28 per share in 2000 followed by a negative $1.29, then a negative 52 cents eps.  The gargantuan loss in 2000 seemed to be off putting to many investors.  But things have changed.

EPS seems to be back on track.  While 2004 saw .16 cents a share, then a disappointing 2 cents a share, last year came in at 15 cents a share.  Analysts expect 2007 closed at 48 cents and are predicting 60 cents next year.

There's good reason to believe these numbers.  In the third quarter, revenues were 31% above the same quarter of the previous year.  Earnings almost doubled from 7 cents to 15 cents a share.  Demand from domestic (51% of sales) and international (49%)  companies is strong.  Margins are growing because a larger percentage of sales is from higher margined video-processing solutions and software.

Harmonic has two products that are helping gain market share: its high definition and standard-definition video encoders.  Furthermore, it offers products in the ever growing segments of video processing, video-on-demand, and network management solutions.  

There are some extraordinary costs that Harmonic will carry for a while.  It recently bought Rhozet and that increased headcount to a higher level.  That additional payroll will have to be cut or revenues will have to grow to increase margins.  

The company recently announced it will offer 12.5 million shares at a price of $12 a share.  The stock is trading at $10.  That offering won't happen for a while or the company will lower the price.  In any event, it means share count will go from 81 million to 93.6 million, if and when the secondary is issued.  In any event, that amount of stock overhanging the market will keep the price subdued until after all the stock is sold.

Some numbers: Comcast Cable is 12% of sales.  Current assets are 2.5 times current liabilities.  Return on Equity should hit 21% this year, up from 7% last year.  Next year analysts predict 25%.  Net profit margin is expected to be 13% this year and 16% next year.  Sales for 2007 should finish at $307 million and hit $345 million in 2008.

As mentioned earlier, this is a stock to carefully consider before buying.  It's history has been one of extreme volatility.  While earnings are definitely improving and appear to be predictable, this is still a relatively small company (market cap of $800 million).  That usually means high volatility, something the company has already demonstrated emphatically.

- Company Web site: www.harmonicinc.com

- Ted Allrich