Billionaire Leon Cooperman Made a Big Bet on This Teleconference Company
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A 13G filed with the SEC has reported that Omega Advisors, a hedge fund managed by billionaire Leon Cooperman, owns 9.6 million shares of Polycom (NASDAQ: PLCM), a $1.8 billion market cap technology company whose products are aimed at easing remote voice and video conferencing. This is up from 5.7 million shares at the beginning of January, according to Omega’s 13F for the fourth quarter of 2012 (see more of Cooperman's stock picks), and means that the fund now owns 5.4% of the total shares outstanding.
Polycom’s stock price has fallen 45% in the last year on weak financials. Revenue was down slightly last year from 2011, after two consecutive years of strong top-line growth. While the services business did grow nicely, this was offset by a decline in product sales. With costs actually increasing in 2012 from their levels in the previous year, Polycom reported earnings of about $10 million for the year, down from over $130 million in 2011 and well below what the company had done even in 2008 and 2009. Last quarter revenue was down 9% compared to the fourth quarter of 2011.
Analyst expectations are that Polycom will recover, with their consensus implying a forward price-to-earnings multiple of 12. If the company could hit that target, then it would only need to show modest earnings growth from that point to be undervalued; however, the trick obviously is to reverse the current business trends of lower revenue and higher costs both to achieve the sell-side’s expectations and be in a position to grow the business. So we’d say this is a risky move for Cooperman and his team.
With small-cap stocks such as Polycom, it can be particularly useful to see how they are being traded by hedge funds. Small-cap stocks are less widely followed by large institutional investors and by the financial media, and so they are more likely to be mispriced in one direction or another. In addition to Cooperman’s position, Lee Ainslie’s Maverick Capital reported a position of 8.2 million shares at the end of December. Billionaire Ken Griffin’s Citadel Investment Group increased its own holdings of Polycom by 48% to a total of 2.8 million shares (check out more stocks Griffin was buying).
Peers for Polycom include Cisco Systems (NASDAQ: CSCO), Citrix Systems (NASDAQ: CTXS), Riverbed Technology (NASDAQ: RVBD), and Juniper Networks (NYSE: JNPR). There is a substantial gap in how these companies are valued in the market: Citrix, Riverbed, and Juniper also carry high valuations in relation to their trailing earnings, in the sense that each has a trailing P/E of 40 or higher. Wall Street analysts expect that Riverbed and Juniper will see dramatic improvements in their net income over the next two years, resulting in much more attractive forward P/Es, but we would be skeptical of this degree of optimism.
Citrix is also expected to grow its earnings, though while revenue was up strongly in its most recent quarter compared to the same period in the previous year, bottom-line growth was limited. Cisco, meanwhile, carries trailing and forward P/Es of 12 and 10 respectively. While it may not have the same prospects as these other companies, it has been growing its business recently and looks like a much more attractive value stock.
It’s notable that Cooperman and his team have been adding shares of Polycom, but we think that we would avoid the stock for now. The market is already pricing in high expectations for the company, despite the fact that at least recently its business has been on a downward trend. Cisco in particular seems like a better prospect for further research.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends Cisco Systems, Polycom, and Riverbed Technology. The Motley Fool owns shares of Riverbed Technology. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!