Tellabs, Inc

1
Tellabs, Inc

• 4/1/02

Al Goldstein
2
Economic Overview

• Economic Recovery is expected in 2002
• Strength of recovery is uncertain
• Stock markets have surged tremendously since
  October
• Prices have grown faster than earnings
• Conditions likely to favor companies who quickly
  rebound with strong profitability (difficult for
  technology sector)

3
Business Overview

• Tellabs, Inc. designs, manufactures, markets and
  services optical networking, next-generation
  switching and broadband access solutions
• The Company also provides professional services
  that support its solutions

4
Vital Stats

• Price 10.45
• Sales (ttm) 2.2 billion
• NI (ttm) -182 million
• Profit Margin (ttm) -8
• EPS (ttm) -0.45
• P/E NA
• Current Ratio 6
• Market Cap 4.3 billion
• 5 Yr Expected Earnings Growth 16

5
Original Proposal

• Buy 400 shares _at_ 57.125 on March 10, 2000
• Justification
• Global solutions provider to telecom service
  providers (strong growth industry)
• Surpassed 2000 sales goal of 2 billion
• Named one of SPs best performing stocks by
  Business Week/Investors Business Daily

6
Recent Events

• Company hurt tremendously by the suffering
  telecom industry
• Balance sheets is still very strong
• 700 million in cash and virtually no debt
• Changing industry dynamics has limited future
  growth and visibility
• Customers are still not spending and the recovery
  is uncertain

7
Base Case Valuation
8
Ideal Case Valuation
9
Downside Case Valuation
10
Valuation

• Base Case 5.8
• Assumes return to profitability in 2002
  (0.19/share), strong growth in 2003 (183), then
  16
• Ideal Case 6.6
• Assumes (0.21/share) in 2002, 200 growth in
  2003, then 20
• Downside Case 5.3
• Assumes (0.17/share) in 2002, 174 growth in
  2003, then 10

11
Base Case Sensitivity
12
Recommendation

• SELL current holding
• Justification
• Limited long term visibility
• Changing industry dynamics (lower growth/more
  competition)
• Valuation