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Inside Wall Street: Suitors May Be Calling on Polycom
September 13, 2010 | Chris Payatagool
A technology sector that has attracted scant investor attention is videoconferencing, even though it's on its way to becoming the chosen tool for companies seeking efficiency and productivity with greatly reduced travel costs. The major Wall Street houses have all but ignored the group, so not much is known about stocks that excel here.
Cisco Systems (CSCO), which recently acquired videoconferencing firm Tandberg, is the top provider of videoconferencing gear. But another key, if smaller player, in this rising market that has caught the eye of some investors is Polycom (PLCM). It develops and makes video-, voice-, data- and Web-conferencing equipment systems that provide corporate users with a complete communications and videoconferencing network infrastructure.
But what adds spice to the stock is its potential as an attractive takeover target. Rumors have swirled that Polycom has been approached last year by two different groups with feelers proposing a merger or a buyout. Such speculation is fueled in part by Polycom's alliances to develop and market voice over Internet protocol (VOIP) communications products with several major tech companies, including Hewlett-Packard (HPQ), Microsoft (MSFT) and Avaya, a unit of Nortel Networks. In Microsoft's case, Polycom has a deeper relationship that involves a development and marketing pact to integrate its desktop, conference-room video system and network hardware and software systems.
"Compelling Growth and Value Play"
Polycom is "the last pure play in audio- and videoconferencing, and the last large independent player in this space," says Gregory MacArthur, president of market advisory firm Viewpoint2000. He notes that Polycom has a solid balance sheet, with $500 million cash on its books and no debt. "Polycom is a compelling growth and value play in a rapidly expanding industry," says MacArthur. With videoconferencing, corporations can hold board meetings or conferences quicker and more efficiently because employees don't have to travel long distances to attend.
Currently trading at $26 a share, Polycom's stock is worth $36 to $38, figures MacArthur, based on analysts' consensus earnings estimates of $1.40 a share for 2011 and $1.55 in 2011.
Indeed, the stock deserves to trade higher, says Tavis C. McCourt of investment outfit Morgan Keegan, given his expectations that Polycom will produce "a superior growth rate," and at the same time has the "potential to be acquired over time." He rates it as outperform with a price target of $34 a share.
In an Important Secular Trend
Polycom is an "effective option for investors to gain exposure to the high-growth videoconferencing/telepresence market," according to Jeff Evenson, analyst at investment firm Sanford C. Bernstein, who initiated coverage of the company on Sept. 8.
In a research report, he notes that Polycom is the only large competitor to Cisco and as such should also gain market share in the videoconferencing systems market. Evenson expects further growth in demand: He forecasts that companies will spend some $30 billion on telepresence systems over the next five years. So, he sees videoconferencing/telepresence staying in an important secular trend with upside growth potential over the next three to five years. He puts the Polycom shares hitting $38 a share in a year.
Another analyst who recently started coverage of Polycom is Stephen Patel of Gleacher & Co., who notes that the company "represents an open-ended multiyear growth story." He tags the stock a buy, with a price target of $34.
Extraordinary Returns and Takeover Potential
Although not yet widely known among individual investors, Polycom counts some of the large institutional investors among its top shareholders. Among them: Wellington Management, which owns an 11.1% stake; BlackRock Institutional Trust, with 4.8%; and Vanguard Group, with 4.1%.
As the equity market continues to pull ahead on improving economic data, tech stocks will be at the forefront of the advance. And among the techs, Polycom should deliver what some pros expect will be extraordinary returns -- enhanced by its potential as a takeover target.
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