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Topic: Growth Stocks

Avaya Inc. $10 – New York symbol AV

AVAYA INC. $10 (New York symbol AV; WSSF Rating: Average) makes telecommunications equipment that helps over one million businesses and government agencies manage their phone and data networks. Avaya was a division of Lucent Technologies Inc. until September 30, 2000, when Lucent handed out its Avaya shares to its investors.

Selling equipment accounts for about 47% of Avaya’s total revenue. The remaining 53% comes from equipment rentals, plus maintenance and other services. Overseas markets account for 40% of its revenue.

The company’s expertise with traditional phone systems puts it in position to profit from the spread of VoIP technology. Many businesses are now upgrading their systems to handle VoIP, since it can greatly cut their long distance bills. Many Avaya customers are likely to stick with it when they migrate to VoIP, instead of trusting their phones to an untested equipment supplier.

Avaya earned $0.15 a share (total $71 million) in its first fiscal quarter ended December 31, 2005, up sharply from $0.07 a share ($31 million a year earlier). Revenue grew 8.7%, to $1.25 billion from $1.15 billion. Avaya recently started selling its products directly to its major customers instead of relying on wholesalers. This will probably hurt its short-term revenue, but should pay off in the long run.

The company’s operating cash flow is also growing strongly, to $0.22 a share in the most recent quarter from a loss of $0.07 a year earlier. This has let Avaya cut its long-term debt to just 1% of stockholders’ equity. It also gives it plenty of cash for stock repurchases to offset the extra shares issued under its generous stock option plans.

Avaya hit $26 after the spin-off from Lucent, but fell to just $1.10 in 2002. It now trades at 16.1 times the $0.62 a share it will probably earn in fiscal 2006.

But the company’s true p/e is lower considering that Avaya spends 8.0% of its revenue of $10.50 a share on research, which it must treat as an ordinary expense.

Avaya is a buy.

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