2HRS2GO: Fragmentation works for Cabletron
COMMENTARY--Being small helps.
The management team of Cabletron Systems (NYSE: CS) deserves plenty of credit. Cabletron has gone from being a severe laggard just a couple of years ago to one of the few network technology companies that can keep its head up during the current industry downturn. But let's keep things in perspective also: The company doesn't face the size obstacles that its larger rivals do.
Wall Street was impressed by the latest report from Cabletron Systems (NYSE: CS), which topped fourth-quarter estimates by a penny. More important, the network technology and services company did not cut its forecasts.
That makes Cabletron a rare positive instance in a field where the biggest names--most notably Cisco Systems (Nasdaq: CSCO) and Nortel Networks (NYSE: NT)--have lowered their expectations by a steep margin. CS shareholders reacted positively today.
When Cabletron early last year announced plans to blast itself into pieces, I thought the move smacked of desperation. The stock was plunging, quarterly reports were disappointing, and Cabletron seemed like another once-hot company destined to be crushed by a Cisco-Lucent-Nortel onslaught. I thought Cabletron's restructuring looked like a move mainly designed to juice the stock.
Despite my skepticism, the new organization has worked extremely well on a fundamental level. Since divesting some properties and rearranging the rest into four separate entities under the umbrella of a holding company structure, Cabletron has topped analyst estimates every quarter. Cabletron companies like Enterasys Networks, Riverstone Networks or Aprisma Technologies can now move faster than competitors.
"We've been able to react much more nimbly," said Enrique Fiallo, president of Enterasys.
Company executives radiated confidence when they talked to analysts last night. Don't be surprised if Cabletron posts relatively strong annual growth of 40 percent. Fiallo's declaration was typical: "Enterasys will continue to capitalize on our competitors' difficulties and accelerate our market share gains."
This is probably true. On the other hand, when you're coming off an annual revenue base of $1 billion--or less than a sixth of what Cisco reports in a single quarter--it's a lot easier to post above-market growth rates.
"They're not very big, so they don't have to take a lot of market share to do well," notes SunTrust Equitable Securities analyst William Becklean.
But the stock isn't exactly priced for optimistic returns anyway, so why worry about the size? Even with today's gains, Cabletron trades at roughly 22 times estimated earnings for this year. That's inexpensive compared to other networking stocks.
And Cabletron holds the promise of at least three spin-offs to CS shareholders. The Internal Revenue Service gave Cabletron the green light to spin off its remaining Riverstone shares, and with that precedent, Cabletron has now begun similar plans for Enterasys and Aprisma. Should the stock market rebound--we can always hope, can't we?--the latter two companies could go the IPO route. Either way, Cabletron investors win.
Breaking into smaller pieces has done a world of good for Cabletron. Judging by today's stock market action, people are starting to care about the company again, an incredible feat itself.
So far, Cabletron stands as an example of a corporate reengineering that actually worked. That makes it an even rarer beast these days. 22GO
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