Third Avenue Nears 10% Stake In Tellabs

Third Avenue Management, a value investing fund which was founded by Marty Whitman in 1990 and has over $10 billion in assets under management, has acquired a total of 35 million shares of Tellabs, Inc. (NASDAQ:TLAB). Tellabs is a $1.1 billion market cap communications company which provides broadband and networking equipment; according to the recent filing with the SEC, Third Avenue owns 9.6% of the outstanding shares. Our database of 13F filings shows that at the end of June Third Avenue had owned 23 million shares of the stock. Research more stocks that Third Avenue owned.

Earlier this month Tellabs, Inc. released its 10-Q for the third quarter of the year. Revenue has been down throughout 2012: a 20% decline for last quarter versus the third quarter of 2011, bringing the company’s top line for the first nine months of 2012 16% below the figures from a year earlier. To its credit, Tellabs has reacted by slashing expenses. Q3 2011 included a large impairment expense, but even excluding that operating expenses are down 36% with gross margins only slightly down. As a result the company was nearly profitable last quarter, a milestone it did not come close to in the first half of 2012 or in the same period in the previous year. Tellabs has also announced that it has further restructuring plans in the works.

AQR CAPITAL MANAGEMENT

As can probably be inferred, Tellabs, Inc. doesn’t have enough profits on a trailing basis for its P/E to be meaningful, and Wall Street analysts only 2 cents of EPS for 2013. The company started paying a dividend of 2 cents per share in 2010, and has been good at making those quarterly payments, which gives it a dividend yield of 2.7%. It’s good to see the company turning around, and perhaps even moderate profits will give Tellabs value potential, but for now we don’t have enough confidence to recommend buying. Cliff Asness’s AQR Capital Management had a small position in the stock at the end of the second quarter (see Cliff Asness’s favorite stocks).

The obvious market leader in the communications business is Cisco Systems, Inc. (NASDAQ:CSCO). Cisco carries trailing and forward P/E multiples of 11 and 8, respectively; its earnings have been up recently but even if its growth slows those figures are quite low. For these reasons, we had thought that Cisco made for a good value stock and we still think that. Read more about why we think that Cisco is a good buy.

Tellabs can also be compared to Alcatel Lucent SA (NYSE:ALU), Riverbed Technology, Inc. (NASDAQ:RVBD), and Juniper Networks, Inc. (NYSE:JNPR). Alcatel-Lucent reported a 5% decline in revenue in the third quarter versus a year earlier, and that stock trades at a forward P/E of 28 even after a 51% decline in the last year. We don’t think that it’s a good stock to buy. Riverbed and Juniper have quite similar profiles in terms of their valuations relative to earnings figures: their trailing P/Es are between 40 and 50, while they trade at 15 and 16 times their respective forward earnings estimates. Note that this indicates that the sell-side expects strong growth in the bottom line in 2013 (as, in a way, it does for Tellabs). Having a moderate forward P/E is good, but we generally prefer to be seeing most of those earnings up front. Juniper also experienced an 80% decline in earnings last quarter from the same period in 2011, so we’d particularly avoid that stock.

Third Avenue has likely put considerable time and effort into determining when Tellabs will break into profitability and to what degree it will prosper from that point. We’re hesitant, however. Analyst expectations are fairly low and we see little reason to buy the stock rather than the more attractively priced Cisco.

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