Cabletron slumps despite getting a "buy" rating

Salomon Smith Barney, which helped underwrite the initial public offering of the network-equipment provider's Riverstone spinoff in February, started the stock with a "buy" rating and a 12-month price target of US$30 a share.

Analyst Alex Henderson said the company is "well positioned in two of our favorite parts of the communications-equipment universe, the enterprise and metro markets."

Despite the high praise, Cabletron shares fell US$1.31, or 7 percent, to US$18.25 Wednesday, as the Nasdaq composite plunged 91 points. Wednesday's losses aside, the stock has gone up 72 percent in the past six weeks, and all 12 analysts tracking it maintain either a "buy" or "strong buy" recommendation.

Two weeks ago, UBS Warburg analyst Michael Weintraub jumped on the bandwagon when he pegged Cabletron a "buy" rating and estimated a 12-month price target of US$22, telling investors that owning Cabletron offers them an inexpensive way to get their hands on a piece of fast-growing Riverstone.

Cabletron holds an 86 percent stake in Riverstone and will soon be spinning off those shares to its common shareholders.

It wasn't too long ago that Wall Street lost all interest in Cabletron, shunning it in favor of Cisco Systems and Nortel Networks. Now those two companies are reeling from slumping demand and excess inventory while Cabletron tries to find an equitable way to spin off its remaining properties to its shareholders.

Riverstone was one of four Cabletron spinoffs it plans to take public. Enterasys Networks targets corporate networks. Aprisma Management Technologies sells Cabletron's network management software, and Global Network Technology Services provides consulting services to customers.

"Enterasys Networks division shows strong signs of a turnaround, and the company should continue growing faster than other enterprise networking companies over the next few quarters," Weintraub said. "Aprisma should benefit from growing demand for service creation and provisioning as well as enterprise needs for network infrastructure management."

Cabletron's transition from a network-equipment provider to more of a holding company has allowed it to do something else that Cisco and Nortel haven't in recent quarters: meet or beat analysts' estimates.

Last quarter, Cabletron beat the Street when it posted a profit of US$10.7 million, or 6 cents a share, on sales of US$291 million and told investors it was comfortable with analysts' estimates for the first quarter.

Wall Street is also enamored with the fact that Cabletron exited the fourth quarter with more than US$1.2 billion in cash and short-term investments, a war chest it can use to finance the growth of Enterasys and Aprisma without having to turn to the capital markets.

"Cabletron went through a very messy period that took a lot of time to clean up," said Peter Andrew, an analyst at A.G. Edwards. "Now they're finally doing exactly what they said they would do. I've been following this company since the early 90s, and now it's finally starting to pay off."

Analysts are projecting a profit of 8 cents a share in the first quarter on sales of US$310 million.

"Cabletron has a big enough installed base that it can provide decent visibility even in this market," Andrew said. "It's also a small enough company that it can micromanage itself through this period unlike some of the other companies in this space."