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Topic: Growth Stocks

Avaya Inc. $10 – New York symbol AV

AVAYA INC. $10 (New York symbol AV; Aggressive Growth Portfolio, Manufacturing & Industry sector; WSSF Rating: Average) is a leading maker of telecommunication equipment for large businesses and government agencies. This gear helps its clients efficiently manage their voice, data and Internet traffic.

The company gets roughly half of its revenue selling equipment, and the other half from maintenance and other services. That cuts the company’s exposure to the increasingly competitive telecom industry.

At the 2006 FIFA World Cup soccer tournament in Germany, Avaya installed the largest voice and data network ever built. The U.S. Army recently selected Avaya, as part of a group, to overhaul communications at its bases around the world.

High profile deals like these further enhance Avaya’s already strong reputation, and should help it win more contracts.

The company is now focusing on cutting costs, particularly in Europe, which accounts for 30% of its total revenue. This led to restructuring charges which cut its profits in its third fiscal quarter ended June 30, 2006, to $0.10 a share (total $44 million) from $0.40 a share ($194 million) a year earlier. However, the year-earlier quarter included a $123 million tax gain. Revenue rose 4.8%, to $1.3 billion from $1.24 billion.

The lower earnings surprised investors, and caused the stock to fall 10%. It now trades at 20.8 times the $0.48 a share it will probably earn in fiscal 2006.

Avaya spends around 9% of its revenue of $11 a share on research, mostly on new products that use VoIP (Voice over Internet Protocol) technology to make phone calls over the Internet. These products should spur strong growth for years to come.

The company is debt free and has $822 million ($1.80 a share) in cash, which improves its long-term chances of success. But Avaya’s stock will likely make little progress until its earnings improve.

Avaya is a hold.

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