Hardware & Infrastructure
Commentary
2/27/2004
01:42 PM
William Schaff
William Schaff
Commentary
Connect Directly
RSS
E-Mail
50%
50%

Taking Stock: UTStarcom's Growth In Emerging Markets

Phone company isn't content with growing only in China

I'm about to head off to another trip to Asia. The economic expansion in the Pacific Rim is amazing--no wonder everyone wants to invest in China. My problem is that I'm much more familiar with domestic and European businesses than I am with emerging companies in developing countries. But recently, I've found a pretty decent proxy.

China's economy is expanding rapidly, and its telecommunications infrastructure has trouble keeping up with demand. The problem is exacerbated by the significant numbers of rural villagers moving to the cities in search of a better life. According to some recent economic studies, urbanization in China is expected to increase from 35% in 2000 to 55% in 2020, a migration of 260 million people--about the population of the United States.

Telecommunications infrastructure must be built to support this potential growth, but wireline is inefficient and expensive, and the average Chinese citizen can't afford wireless technology. UTStarcom, based in the United States but with most of its operations in China, has a 60% share of the Chinese market in wireless technology called Personal Access Services. It works much like a cordless phone system, but it allows for greater range throughout town. It's also half the cost to the consumer of second-generation wireless service. Personal Access Services helped UTStarcom double sales last year, and the company is projecting a more modest 20% to 25% growth in revenue this year.

UTStarcom isn't content with growing in China alone. It's expanding into other emerging nations, including Honduras, Mexico, and Vietnam, all of which have nicely growing economies and an inexpensive telecommunications network. China represents 83% of revenue, but the company projects growth in Vietnam, Latin America, and other developing countries will reduce this amount to 50% in five years.

Doing business in emerging markets is fraught with political and economic risk. Though the growth prospects of China are clear, it's still a developing country. This raises the level of financial risk for investors because of the higher level of political risk consistent with developing countries versus developed ones. In addition, competition from emerging technologies will make some inroads over time.

UTStarcom's stock price seems relatively cheap to me, reflecting investors' unease with emerging markets and the future of Personal Access Services technology. With sizable growth in wireless handset and telecom infrastructure, I project that revenue should grow at least 25% this year and at least 15% annually over the next few years. Operating margins are likely to settle in the 13% to 14% range, and the company should generate $200 million in free cash flow this year by my estimate. A company with a potential future like this in developed markets would likely trade at a much higher price/earnings multiple than the S&P 500. However, UTStarcom's 2004 price/earnings multiple, based on Wall Street consensus earnings, is 17. Given its growth prospects, this multiple seems eminently reasonable to me. I haven't been able to say that about too many companies lately.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.


To discuss this column with other readers, please visit William Schaff's forum on the Listening Post.

To find out more about William Schaff, please visit his page on the Listening Post.

Comment  | 
Print  | 
More Insights
The Business of Going Digital
The Business of Going Digital
Digital business isn't about changing code; it's about changing what legacy sales, distribution, customer service, and product groups do in the new digital age. It's about bringing big data analytics, mobile, social, marketing automation, cloud computing, and the app economy together to launch new products and services. We're seeing new titles in this digital revolution, new responsibilities, new business models, and major shifts in technology spending.
Register for InformationWeek Newsletters
White Papers
Current Issue
InformationWeek Tech Digest - July 22, 2014
Sophisticated attacks demand real-time risk management and continuous monitoring. Here's how federal agencies are meeting that challenge.
Flash Poll
Video
Slideshows
Twitter Feed
InformationWeek Radio
Archived InformationWeek Radio
A UBM Tech Radio episode on the changing economics of Flash storage used in data tiering -- sponsored by Dell.
Live Streaming Video
Everything You've Been Told About Mobility Is Wrong
Attend this video symposium with Sean Wisdom, Global Director of Mobility Solutions, and learn about how you can harness powerful new products to mobilize your business potential.