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Tuesday, August 21, 2007

BigBand Networks - sad to say, it's fairly priced at these levels

I have been a proponent of BigBand Networks (BBND) since I wrote a post that paired Cisco Systems (CSCO) and BigBand as a combined Pick o' the Month. In that post I described the networking powerhouse and the upstart and proposed that Cisco might someday buy BigBand.

Since that time BigBand has reported earnings twice as a public company. Both times have been a disappointment. The stock remains in the TradeRadar model portfolio under the assumption that it is an early investment in a company that will reward patient, long-term investors.

In the wake of BigBand's latest earnings report (and price decline), I thought comparing BigBand to Cisco might be an interesting way to develop an understanding of where BigBand stands at this time in its drive to become a company to be reckoned with. Clearly they are very different companies with one being huge and the other being small. So rather than looking at absolute numbers we'll focus on ratios.

Examining key ratios as provided by moneycentral.msn.com, we find the following:

Sales Growth Rate for BBND is more than double that of CSCO but then again, CSCO is a much bigger company and behemoths have a harder time putting up high growth numbers.

P/E Ratio for CSCO is a reasonable (for a tech company) 25.6 but for BBND it over 47. Depending on how it is calculated (BBND has been public for only two quarters) even 47 seems kind of low for a trailing twelve months given there have been some losses in past quarters.

At BBND's current price, around $9 per share, it has a Price to Sales ratio of only 2.48 while CSCO is up at 5.21, more than twice as high.

Looking at Price to Cash Flow, BBND is more than 30 and CSCO is around 20.

CSCO is doing a better than BBND in terms of Gross Margin but BBND is lagging the industry while CSCO is leading the industry by a small amount.

By the time we get to Net Profit Margin, we really separate the men from the boys. Where CSCO is doing a bit better than industry averages at 21%, BBND is way down the spectrum at 5.3%

Receivable and Inventory Turnover for CSCO are both over 9 but for BBND these two measures are down around 7 and 6, respectively.

On the plus side of the ledger for BBND, they are growing at a good rate. Looking at Price to Sales, it appears the stock is not over-valued. BBND's Gross Margin may not be great but is still pretty decent.

On the other side of the ledger, even though BBND's stock price is more than 50% off its peak, it still has an uncomfortably high P/E ratio. BBND is not turning over their inventory fast enough. The real problem, though, manifests itself in Net Profit Margin. This is where BBND really falls down and it is the result of expenses being higher than they should be. BBND is a small enough company such that modest changes have large repercussions. Besides R&D expenses being high, stock compensation costs have had a significant impact on GAAP earnings. Without revenues jumping sufficiently to offset the increase in costs, we see BBND in its current predicament where it is forecasting more or less flat earnings for the remainder of the year.

I was hoping that this analysis would lead me to conclude that BBND's recent stock price decline was overdone. Unfortunately, it appears that the stock is probably fairly priced where it is at about $9 per share. It could take some real patience before current investors realize a significant gain.

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