Tellabs, Inc. (TLAB), Cisco Systems, Inc. (CSCO): Is This Telecom Networking Business a Good Pick Now?

Tellabs, Inc. (NASDAQ:TLAB) has been quite an ugly stock for investors as it has lost more than 77.7% of its value on the market over the past three years. Since the beginning of the year, it has dropped by nearly 11% to only $2 per share. I begin to notice this stock, as Joel Greenblatt began to initiate a long position in this stock in the first quarter 2013. Should we follow Joel Greenblatt into Tellabs now? Let’s find out.

Losses narrowed down but no dividend

Tellabs, Inc. (NASDAQ:TLAB) is the designer and provider of various communication system products to communication service providers, including wireless and wire-line service providers, operating in four main business segments: Optical, Data, Access and Services. The majority of its revenue, $432 million, or 41% of the total 2012 revenue, was generated from the Optical segment. The Data segment ranked second with $265.5 million in revenue, while the Access and the Services segment contributed $156.5 million and $198 million, respectively, in sales in 2012. Among the four segments, Optical and Services are the two biggest profit contributors, with $89.6 million and $70 million, respectively, in operating profit, while the Data segment produced a loss of $(6.8) million.

In the first quarter 2013, it experienced a significant drop in revenue, from $257.9 million in the first quarter last year to $209.4 million in the first quarter this year, while the operating loss has been narrowed down from $(136.9) million to $(60.8) million. The improvement in the operating loss was due to much lower restructuring and other charges. The company does not employ much leverage in its operations. As of March 2013, it had more than $1 billion in total stockholders’ equity, $571.6 million in cash and investments, and around $209.6 million in loans related to other marketable securities. The company had paid dividends in the period of 2010-2012, but in the first quarter of 2013, the company does not authorize any dividend payment.

At $2 per share, Tellabs, Inc. (NASDAQ:TLAB) is worth $721.8 million on the market. Because of the huge cash on hand and little leverage, the enterprise value is much lower, at only $150.2 million. However, it does not seem to be cheap, valued at 11.2 times EV/EBITDA. Compared to its much bigger peers like Alcatel Lucent SA (ADR) (NYSE:ALU) and Cisco Systems, Inc. (NASDAQ:CSCO), Tellabs, Inc. (NASDAQ:TLAB) still seems to be relatively expensive at its current trading price.

Cisco seems to be a better and safer pick

Cisco Systems, Inc. (NASDAQ:CSCO) is the global market leader in the core router market. Along with Juniper Networks, Inc. (NYSE:JNPR), the two companies control around 80% of the total market, while Alcatel Lucent SA (ADR) (NYSE:ALU) has been trying to find its way into this market with its Extensible Routing System 7950. Its new product family was estimated to be around 66% more power efficient than the routers of its peers.

In the first quarter of 2013, Alcatel-Lucent generated around £3.22 billion in revenue, 0.6% lower than the revenue in the first quarter last year. The net income dropped significantly, from £259 million to £(353) million. The operating cash flow also came in at £(358) million. CEO Michel Combes commented on its difficulty,

Free cash flow remains a challenge. Strong focus will be placed on working capital management to reverse some of the negative impact incurred this quarter.

The struggling business might be the reason for Alcatel Lucent SA (ADR) (NYSE:ALU) to have the lowest EV multiple. It is trading at $1.50 per share, with a total market cap of around $3.4 billion. The market values Alcatel-Lucent at only 3.88 times EV/EBITDA.

Cisco Systems, Inc. (NASDAQ:CSCO) is a totally different picture. With a strong global market-leading position and consistent profitability, Cisco keeps moving forward strongly. Recently, Cisco announced that it completed its acquisition of Ubiquisys, the leading company in intelligent 3G and small-cell technologies. The company reported that Ubiquisys’ small cell-expertise, combined with Cisco Systems, Inc. (NASDAQ:CSCO)’s mobility portfolio, could deliver a complete package of small-cell solutions. Cisco is trading at around $23.50 per share, with the total market cap of $125.70 billion. The market values Cisco at only 7.15 times EV/EBITDA.

Among the three companies, only Cisco Systems, Inc. (NASDAQ:CSCO) is paying shareholders dividend now, with a decent dividend yield of 2.9%, while Alcatel-Lucent and Tellabs are not paying any dividends for now.

My Foolish take

Personally, I think Tellabs, Inc. (NASDAQ:TLAB) is not a compelling stock to buy at its current trading price. With the fluctuating operating performance and high EV multiple, I would not consider Tellabs to be an investment target now. I prefer Cisco Systems, Inc. (NASDAQ:CSCO) with its global market-leading position, decent dividend yield, and a reasonable valuation.

The article Is This Telecom Networking Business a Good Pick Now? originally appeared on Fool.com and is written by Anh HOANG.

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