Newbridge Networks Corporation is a...

Newbridge Networks Corporation is a world leader in the design and manufacture of digital networks for wide area and local area network applications.

Its cropss can be divided into pair main groups: time divisional multiplexers (TDMs) and fast packet network fruits TDMs products allow data from different sources to be interleaved and sent through the whole extent of a single communication channel; the data is then reassembled at the receiving period resulting in a more efficient use of the communications channel. Fast packet harvests are designed to optimize bandwidth and increase the one and the other capacity and speed of data transfer.

Newbridge's proceedss are used in more than 100 countries, and its customers include more than 200 of the world's largest telecommunications service providers.

STUDYING A STOCK

Investors use the Stock Selection Guide (the "Guide") to answer three main questions.

1 Is the stock's price in the "Buy Zone"?

2 Is the stock's passing from hand to hand price "On Sale"?

3. Is the total look fored rate of return over the nearest five years adequate relative to the stock's risks?

QUESTION #1: IS THE now passing PRICE IN THE "BUY ZONE"?

In order to define the corrupt Zone, the Guide requires sum of two units numbers: an estimated High Price in five years and a possible subdued Price during the next five years.

Estimated High Price In Five Years

The High Price is calculated at multiplying an estimated High EP in five years by means of an estimated High Price-Earnings Ratio (P/E) in five years.

(a) Estimated High EPS

In order to estimate a High EP in five years, discernments about future growth in returns and earnings must be made. incomes Growth: As indicated in the accompanying Guide, the average pay by substitution rate of growth in returns during the 1984-1995 study period was approximately 65% This increase resulted from a very stout demand for Newbridge's core wide area networking products--especially between fiscal years 1988 and 1995 when i North American demand was particularly hardy However, recent results for the last half of the thought period have seen revenue germination decline to approximately 46% and again to 14% between the first quarter of 199 and 1996 This decline in receiptss is most likely due to the maturing market for TDM in North America and Europe

When judging the rate at which to swell revenues in the future, the default discernment is often to use the average historical product rate over the study period--unless there is an indication that this rate may experience a significant change. Although rife quarterly results suggest revenues are declining, Newbridge's expanding work line and recent international expansion could rise in improved growth in the near future

Newbridge's historical pullulation rate in revenues of 65% is extremely high and the Guidelines for decree (see page 13) suggest that it is unusual to put forth future revenues at more than 20% for a period as in extent as five years. Therefore, the A common-senses project revenues to grow at 20% through the whole extent of the next five years.

EP Growth: During the close attention period, Newbridge's fully-diluted earnings by means of share before unusual items (EPS) grew at an average annual combine growth rate of 75%--an extremely high rate that would be difficult to sustain across the long term.

Despite this, new results for the last half of the contemplation period have seen EPS germination increase to approximately 126%. However, increase between fiscal years 1994 and 1995 dropp to the more sustainable rate of 18% And year-over-year extension for the first quarter of 1996 was negative (-10%) This decline in EP muses increased operating expenses and research and unfolding outlays related to Newbridge's rapidly expanding performance line.

When determining the rate at which to germinate EPS in the future, the default ballast is often to use the average historical expansion rate--unless there is an indication chat this rate may bear a significant change.

Part 2 of the Guide helps investors identify threats to hereafter growth by evaluating the efficiency and effectiveness of the company's management.

Newbridge's operating. profit margin (OPM) has shown steady improvement athwart the last five years of the inquiry period. The debt ratio point outs a downward trend during the last five years and the late trend in return on used by all equity (ROCE) has been upward (with the exception of 1995 data).

Although Part 2 of the Guide does not indicate any threat to subsequent time EPS growth, the historical increase rate in EPS of 75% is extremely high and can not reasonably be rely uponed to continue. Therefore, the A decrees project growth at 20% through the whole extent of the next five years. This projection ensues in an EPS estimate of $552 in five years.

(b) High P/E In Five Years

When selecting a High P/E in five years, the default notion is often to choose the average High P/E throughout the study period--unless there is an indication of a late trend towards a higher or lower P/E Although no similar trend is evident in Part 3 of the Guide, it is considered unusual to pick a High P/E greater than 20X Therefore, instead of selecting the Average P/E throughout the study period (32.2X) a High P/E of 20X was used.