Investors can cash in as demand for fiber optics takes off

Despite the countless miles of unused fiber-optic cable laid during the dot-com bubble, demand for the high-capacity lines has been rising. And that bodes well for the stocks of companies that produce not only the cable but also the equipment that runs it.

Fiber-optic cable, typically made of ultrapure glass, can carry vast amounts of data via light. During the boom days of the Internet bubble, phone companies buried vast amounts of fiber-optic cable, in part because they assumed that Internet traffic would soar.

Many companies initially laid large cables underground, even though many of the fibers wouldn't be used at first.

In the years since the dot-com boom, engineers have figured out how to move more data through the same amount of fiber, increasing the fiber-optic capacity. As a result, there are still untold miles of unused fiber cable, or dark fiber, in the USA.

But now, demand for new fiber-optic cable is zooming. "Worldwide, we expect double-digit growth rates in fiber-optic cable demand the next few years," says Richard Mack of KMI Research/CRU, a London-based research firm. One key reason: the boom in moving video and audio files via the Internet.

The light fantastic

Watching a video on the Internet sops up far more bandwidth than just surfing websites does. The proliferation of video sites such as YouTube means that consumers have been demanding more and more bandwidth, to move files at faster speeds.

Fiber-optic cable demand should rise 10% in the USA this year, Mack says, and by as much as 15% in China and 20% in India. Each nation has different reasons for high demand:

•USA. There's plenty of dark cable left, mainly around large metro areas. And telecom companies are still laying cable. "It's part of forward planning," Mack says. "As we speak, people are putting in more cable than they need."

Demand for U.S. fiber-optic cable isn't coming from companies that are laying fiber for 20 years from now; it's mainly from companies that are connecting houses and apartments to existing fiber-optic lines. Despite all the cable available between cities, telecommunications companies still have to run cable down streets to link homes and offices to the existing lines.

About 1.3 million U.S. households, or 1.3% of all, were connected directly to fiber-optic lines in July, according to the Fiber-to-the-Home Council, a trade group. That number has grown to about 2% of households since then and could reach 25% within three years, says David St. John, spokesman for the group.

Verizon is spearheading the fiber-to-home growth in the USA. It connected about 203,000 new customers to its FiOS broadband and TV services in the second quarter of 2007. The company plans to spend a staggering $23 billion on its fiber-optic network by 2010. "Verizon is betting the farm on it," St. John says.

Helping to accelerate fiber-to-the-home growth is new bendable fiber, which makes it easier to connect apartment buildings to fiber-optic cable. Fiber-optic cable has high capacity. But it can crack or lose capacity if it's bent too sharply. On Wednesday, Corning, the largest U.S. producer of fiber-optic cable, introduced its ClearCurve cable, which it says is as bendable as copper wire — yet has about 3 million times the capacity.

•China. Chinese fiber-optic-cable demand has grown about 20% a year the past few years, Mack says, but will slow to about 15% this year because China has already built much of its city-to-city backbone. Still, the Chinese will use a great deal of cable as they prepare for the 2008 Summer Olympics in Beijing.

•India. India is still building its Internet backbone, and demand for fiber-optic cable should grow about 20% a year, Mack says.

The biggest player in the fiber-optic-cable business is Corning. And it's a favorite among those who are bullish on fiber stocks. "Our biggest play there is Corning," says Kevin Landis, manager of Firsthand Technology Value fund.

Fiber options

Landis figures that Corning will benefit from the push to hook up households via optical fiber. He also thinks Corning will benefit from international growth. "Even though WorldCom deployed too much fiber across the Great Plains, that doesn't help China any."

Corning's stock performance hasn't lived up to its potential: It's up just 3.3% the past 12 months. Daniel Scalzi, CEO of Matrix USA, a Wall Street research firm, thinks the company has to shore up its balance sheet: "When you look at its profit margin and valuation, it doesn't work for us. They're spending a lot of money to make not enough money. That said, they're in a great business."

Ken Croft, manager of Croft-Leominster Value, suggests Cisco, which makes much of the equipment necessary for fiber-optic telecom. The stock has soared 40.8% over the past 12 months. But it isn't cheap: The stock is selling for 21.8 times its 2009 estimated earnings. (The price-earnings ratio tells you how expensive a stock is, relative to earnings. Lower is better.)

Another suggestion: General Cable, (BGC) which makes copper as well as fiber-optic cable. The stock has soared nearly 80% the past 12 months, and it sells for about 16 times its 2008 estimated earnings. But it's volatile: It's fallen about 15% the past three months.

A final possibility: Sumitomo Electric, a Japanese company with a fiber-optic-cable division.