Market Insight: Nordic telecoms hit by high bills
By Christopher Brown-Humes in Stockholm
FT.com site; Feb 18, 2003
The Moody's credit rating downgrade suffered by Ericsson of Sweden on Tuesday served as a stark reminder of the woes that continue to afflict the global telecommunications equipment sector.
The industry, entering a fourth consecutive year of downturn, is still battling to cut its costs faster than its revenues are falling and, crucially, there is still no sign of telecom operators starting to spend heavily on network equipment again.
Ericsson is one of four companies that have suffered particularly heavily from the slump. Like Nortel and Lucent of North America and Alcatel of France, it saw its share price fall by more than 90 per cent from the 1999/2000 peak to the 2002 trough, and all four companies have seen their debt downgraded by the credit rating agencies to junk status.
Nokia of Finland, Siemens of Germany and Motorola of the US have also seen their share prices fall sharply, but they have suffered less, partly because they are not as extensively exposed to telecom infrastructure as their colleagues.
Even after some recovery in their shares in recent months, European telecom equipment stocks have underperformed the Eurotop 300 by 64.4 per cent since the start of 2000 In the US, equipment makers have underperformed the S&P 500 by 74.5 per cent.
The industry has suffered from over-investment at the peak of the IT and telecoms boom and is now paying the price. In the mobile sector, European operators overpaid for third-generation licences in 2000 and have been trying to repair their balance sheets ever since. They are not building out their existing networks, even though there is evidence of capacity constraints, and they have delayed rolling out their third-generation networks.
It is not just the companies which overspent on 3G licences that are cutting back on their investments. As Kurt Hellström, the Ericsson chief executive, has noted even companies without big debts, like the big Chinese operators, have adopted a more cautious attitude to spending. Nor are companies merely cutting spending, they are also trying to drive down equipment prices.
Faced with a near halving of revenues in some cases, the only way companies have been able to respond is through radical cost-cutting. Between them Ericsson, Lucent, Nortel and Alcatel have cut well over 200,000 jobs in the last three years.
Shares in the telecom equipment makers have rebounded since last year, partly on hopes that the worst is over. But, in its comments on Ericsson on Tuesday, Moody's warned it could be next year before there are real signs of the market stabilising.
"We have a negative recommendation on the sector. It's still deteriorating, even if the rate is slowing," says Stuart Jeffrey, analyst at Lehman Brothers in London. Some markets, such as Europe, may show some increase this year, but others, like the US and Asia, will decline.
Optimists argue that spending on infrastructure is unsustainably low and that operators will soon start to order more equipment, particularly as their own balance sheets are rebuilt. But more radical measures may still be needed to ensure the industry's long-term profitability.
"You have to have consolidation. Even when things pick up, there's not going to be enough wallet for all the equipment makers to make a decent return on capital," says Roger Appleyard, credit analyst at ABN Amro in London.
In the meantime, analysts remain unusually divided about the value of individual companies Take Ericsson. Its B shares closed yesterday at SKr6. Morgan Stanley believes they are worth SKr2.50. Dresdner Kleinwort Benson has a target of SKr40. |
