| Telecom Equipment : Bernstein's Paul Sagawa gained recognition for being early on going bearish on the telecom equipment sector downturn. He cautioned of lower capital spending and a glut of capacity. The stocks are not reacting to his bullish call this morning. Sagawa says that carrier capex will increase in 2H02, with Q2 a significant inflection point in this cyclical industry. He prefers Lucent (LU 4.63 +0.04) given its strong exposure to the healthiest carriers. Nortel (NT 4.45 -0.05) may take longer to recover given its IXC exposure. Also, Cisco (CSCO 16.72 +0.15) is much more levered to corporate IT spending, which may get worse before it gets better. With so many carriers recently lowering cap-ex spending expectations, including Verizon last week, this is a contrarian call. Given strong and increasing cash flow by incumbent carriers, historically low spending levels and deteriorating network performance, Sagawa expects cap-ex to follow the traditional back-half loaded seasonal pattern in 2002 and to grow 3-5% in 2003....Briefing.com expects the stocks to be in hibernation for a while. Keys to picking within the sector are solid balance sheets and customers with financial strength. As much bad news as we have heard about Lucent, it managed to keep exposure to the start-up carriers lower than many. The start-ups had to rely on debt and equity financing to buy network equipment. However, the incumbents have never been in financial trouble as their voice businesses have always been cash cows. In that respect, we agree that Lucent makes more sense than Nortel down here. Lucent's main problem is its balance sheet and its repeated trips to equity and debt markets, diluting shareholder value. 3Com (COMS 5.57 +0.13) is a good example of a solid balance sheet with cash/inv approaching $4 per share. -- Robert J. Reid, Briefing.com |
