Susan Kalla's current view on telecom:
Susan Kalla
by Vincent Ryan
Telephony, Jun 4, 2001
The Pessimist
An equities analyst who wears out shoe leather doing demand-side research is about as rare as a blue red setter. Most analysts spend their time digesting management's platitudes and forecasts. But there is a blue dog out there. Her name is Susan Kalla, a former PBS engineer who has been shaking up Wall Street with frank, spicy commentary and mostly dead-on analysis of the telecom downturn.
As of May, Kalla — who recently left BlueStone Capital to join Friedman, Billings, Ramsey — had rare “underperform,” or sell, ratings on all nine telecom stocks she covers, including WorldCom, Level 3 Communications, Ciena, Juniper Networks and Sycamore Networks. Level 3 shares had fallen about 40% since Kalla initiated coverage with a sell rating.
Kalla's central thesis: Telecom is hurting from an overcapacity of supply and falling prices, and that imbalance is biting back on equipment suppliers and service providers. She knows this because she spends time with buyers of telecom in industries such as finance, media and retailing and compares their spending forecasts with the sales projections of service providers.
“For equipment manufacturers we talk to the service providers about growth and capex, and for the service providers we talk to the Fortune 500,” Kalla says. “You get a longer-term view. About 60% of the [corporate] contracts are locked in for multi-year periods so buyers usually have a two- to three-year window on what they're going to spend.”
Wholesalers Level 3, Williams, and Global Crossing are some of Kalla's least favorite service providers because they have undifferentiated services. “They're in a precarious position,” Kalla says. “To survive they have to better equip their competitors, which is kind of an ironic position and certainly not sustainable.”
As Kalla sees it, these carriers have two choices: Cut back on operating expenses, or move up the value chain to corporate accounts. “They need to develop the expertise and more than likely need to increase geographic scope. The large corporate accounts aren't always in the major cities — they're sometimes in the hinterlands.”
Not that emerging companies are her only targets. Although Kalla likes WorldCom's business, she believes the company has many execution and balance sheet issues. If the $50 billion in goodwill assets from the MCI acquisition is subtracted from the balance sheet, WorldCom's leverage goes from 25% debt to 75% debt, Kalla says, noting that the company is also in a period of declining revenues.
It was Kalla's early research with service providers that led her to be one of the frontrunners in predicting a spending slowdown that would jar equipment makers. While she likes Ciena and Juniper for their solid product lines, she considers Sycamore Networks and Redback Systems to have undiversified product lines and customer bases.
But Kalla is not all doom and gloom. As of early May, she says, telecom shares hit their nadir. “Stocks are bottomed out,” she says. “If you shorted them you might get your arms ripped off.”
With Regulation FD limiting the unique information that management can supply to analysts, more and more Wall Street analysts might start turning to researching the demand side. But they might not have the luxury of expressing their viewpoint as candidly as Kalla does.
“Nobody likes it when you tell them their children are ugly,” Kalla says.
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