Firm Finds Its Fortune in Fiber-Optic Field
The Gold Rush left most miners broke, but the vision of California riches came true for the merchants who supplied them.
These days, schemes to mine cyberspace for profit are crumbling everywhere. But like shovels in 1849, gear that helps the Internet work is a great thing to be selling.
And few companies are positioned better for this than Irvine’s Newport Corp., which helps manufacturers crank out fiber-optic systems quickly and reliably at a time demand is overwhelming.
Its precision vibration-control and measuring devices are found in labs around the world. But that’s not why sales have nearly doubled in two years and net income has nearly tripled, or why profit margins leaped from 6.7% in 1998 to more than 12% last quarter.
Or, for that matter, why $10,000 invested in Newport one year ago would be worth a tidy quarter of a million dollars today.
Analysts are salivating and Newport Chief Executive Robert Deuster is popping up on CNBC because of the relentless demand for systems that carry huge volumes of data online.
Fiber-optic companies such as Corning Inc., JDS Uniphase Corp. and Lucent Technologies Inc. rely on Newport’s expertise to help them force ever more data through all that cable.
“Where the orders used to come in for hundreds of thousands of dollars, they now come in for millions and millions,” said Charles Cargile, Newport’s chief financial officer.
Newport says it’s keeping up with demand, but just barely. The company employs 1,200 people worldwide--650 in Orange County--and needs 200 more, mostly engineers.
“The fiber-optics segment remains red-hot,” industry analyst Dave Kang of ABN Amro Inc. said in a report Thursday.
Newport sells research equipment to private labs, the government and aerospace companies. It supplies components, assembly systems and testing devices to computer chip makers. But its biggest and most important division makes systems that other companies use to automate their production of fiber-optic components.
With $300 million cash on hand, a stock that hit $162 a share Friday and only $13 million of debt, Newport is spending heavily to expand and accommodate booming demand. It recently bought privately held automation specialist Unique Equipment Co. in Arizona in a stock deal and is looking for more acquisitions. It just tripled its fiber-optic manufacturing floor space to 75,000 square feet and plans to double that amount in the coming year.
Founded in 1969, Newport began by making ultra-stable stone and steel tables for laser research. At its headquarters in a nondescript industrial park, Deuster sits in his second-story office behind a granite desk--a reminder of the company’s origins.
Downstairs, granite blocks combined with shock absorbers still provide assembly surfaces for laser-testing gear, fiber-optic devices and computer chips. Steel tables, optical meters and components for computer-chip companies are made and shipped from the facility. More products flow from plants in Garden Grove, San Luis Obispo and France.
But what has captivated the fiber-optic industry and Wall Street are machines that perform precision tricks that no other company has mastered so far.
Newport’s strength is automating minute processes done inefficiently by hand. It makes tools, for instance, that can align fibers one-tenth the size of a human hair with precise points on laser diodes no larger than a grain of sand, and then use lasers to weld the tiny devices together.
Newport helps manufacturers create devices that automatically build and test their own complex products. Deuster said he wants to remove workers “altogether from the equation,” creating miniaturized assembly lines where tiny parts are fed in one end, assembled by robot, packaged, tested and spewed out the other end as complete components.
As engineers continue to push the limits on how much data flows on each fiber-optic strand, Newport’s tools will become not only desirable but indispensable, Deuster predicted.
“You’re going to have to have machine technology to do it,” he said. “It can’t be done by hand.”
His views have caught Wall Street’s attention. Of the nine stock analysts who follow Newport, eight rate the company a “buy” or “strong buy.” The sole skeptic, Sean Chaitman of Jesup & Lamont Securities, hasn’t updated his views since rating it “neutral” in February.
Kang, an early fan of the stock, downgraded his rating Sept. 5 to “outperform” after the stock soared in price. But he restored the “buy” last week when Newport announced third-quarter earnings had more than quadrupled to $8.2 million, easily beating expectations.
Kang called the quarter “a blockbuster.”
Piper Jaffray analyst Gregory P. Konezny said the company will benefit from a predicted rapid shift from electronics to optical systems as the favored delivery system for Internet traffic.
Even by supercharged tech standards, Newport’s stock has been a rocket. Adjusting for a recent 3-1 split, it was no more than a $5 stock for most of the 1990s and traded at about $6 one year ago. But it has since soared, shooting up to $192.06 on Sept. 25 before tailing off. It closed at $162 on Friday in Nasdaq trading, up 24% in the two days since its earnings report.
Investors have been fascinated by anything to do with fiber optics, pushing shares of companies such as Cisco Systems Inc. into the stratosphere over the last two years.
Cisco’s stock tumbled along with other tech shares in the spring, but its price-to-earnings ratio--a key measure of investor confidence--was at a heady 107 Friday. But Newport’s ratio Friday was a staggering 273, marking it as a hot stock in a hot market.
Lofty numbers, though, give pause to some technology investors.
Ray Tang, who manages the ETechInvestors group of mutual funds in Laguna Beach, bought Newport at about $4.50 and sold at $125 a share. He figures that if bumps emerge in the fiber-optic information highway, fickle shareholders may dump the stock, as they have so many others.
“I love the company. I want to own them again--when they’re about $80 a share,” Tang said, citing reports of a possible slowdown in installation of fiber-optic cable.
Deuster said that, although installation of cross-country fiber-optic lines has slowed, there is still plenty of line to be laid block to block in huge individual markets such as Los Angeles. And demand for equipment to connect the lines at either end will remain strong, he added, particularly given the demand to feed more data over existing lines.
“The thing seems to be limitless for the next few years,” Deuster said.
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Newport Corp.
Closing stock prices since Jan. 1
FIBER OPTICS BOOM
Newport Corp.’s fiber-optics sales leaped along with semiconductor testing and measuring gear, turning a slow-growth business into a Wall Street dynamo with a stock price that has shot up 26-fold in a year. Sales by market segment for past three years and first nine months of 2000:
(figures in millions)
*First nine months. Does not reflect acquisition of Unique Equipment Co.
** Aerospace/research, computer peripherals, other measuring devices
*
Source: Newport Corp.
