Toronto Stock Soars; But Will Balloon Pop?

WHEN a stock goes from $18 (Canadian; US$14.1) to more than $110 (US$86.4) in less than a year, some people might get nervous. But not with this one, it seems: It has split two-for-one and keeps on going. "It was the second highest-priced stock on the exchange until it split the other day," says Catherine McGravey of the Toronto Stock Exchange.

The company is Newbridge Networks, an Ottawa-based firm that makes its money in arcane corners of telecommunications like multiplexing, which expands the capacity of telephone lines, particularly private networks used by companies to send data and faxes. The technology also can be used in "local area networks," where a number of personal computers are linked together.

Another specialty technology is ATM, or asynchronous transfer mode. The technology speeds the transmission of data over telephone lines by as much as 45,000 times. At that increased speed, enough additional information could be handled to turn a desktop computer into a video conferencing machine.

Sales are increasing, but so far Newbridge Networks has made more money for its investors than it ever has selling equipment.

The company is run by Terrence Matthews, a man who once before turned microchips into gold. Mr. Matthews and a partner founded Mitel in the 1970s. It, too, was an Ottawa-based manufacturer of telecommunications equipment. And it, too, was a darling of the stock market, reaching a high of $48 before coming crashing back to earth.

Mitel eventually was sold to British Telecom in 1985. Its two founders have gone their separate ways; Matthews seems to have retained the magic touch, and he has learned from his earlier experiences, analysts say.

A British immigrant to Canada, Matthews started at the bottom as a researcher with a telephone company before striking out on his own. He has struck it rich again. Mitel manufactures switches, using part hardware, part software. Newbridge's products also involve hardware and software.

ANALYSTS credit Newbridge's success not only to its technology but also to a change in strategic planning; instead of trying to sell its networking products itself, it has allied itself with major telephone companies and other big sellers of communications equipment such as Xerox.

Matthew's controlling interest in Newbridge Networks makes him a billionaire on paper. The stock price also makes the company expensive, in terms of market capitalization.

The company, with sales of $307 million and profits of $60 million, is worth $4.3 billion on the stock exchange. That puts the worth of Newbridge at about 40 percent of the market value of Northern Telecom, Canada's telecommunications giant, which had sales of $11 billion and profits of $680 million last year.

But what impresses investors is the growth in profits at Newbridge Networks - which were only $9.7 million last year - and its technology.

"Its technology is at the frontier; it has entered a niche with burgeoning growth and little substantive competition," says Cheryl Nesbitt, an analyst with Scotia McLeod Inc. of Toronto.

Newbridge Networks will earn $2.55 a share next year in American dollars, predicts Theresa Murphy, an analyst with Smith Barney, Harris Upham & Co. in New York. In Canadian dollars that would be a profit of about $130 million, more than double this year's figure.

Similar reports have fed a buying frenzy of Newbridge stock in Toronto and also on the NASDAQ exchange in the United States. Newbridge has been averaging 500,000 shares traded daily on NASDAQ, compared with about 100,000 a day in Toronto."The buying is primarily in the United States," a Toronto analyst says.

But not everyone is crazy about Newbridge. "It is overvalued," says a Toronto-based technology analyst who asked to not be identified. "American analysts are driving up the price by valuing the company in comparison with other telecommunications firms in the United States. I think the whole sector is overvalued."