Asia Concerns, Fundamentals Peaking; Lowering Rating
• Lowering Rating: We are taking a more cautious view on the stocks in the US Wireless Equipment Universe. We believe current stock prices reflect the strong seasonality of Q4, and are lowering our sector rating to Underweight from Marketweight
• Asian Vendors for Real: Korean, Japanese, and Chinese brands have gained four points of market share in each of the last two years. We believe falling technology barriers have aided these gains. We believe these trends will be a negative because (a) Asian vendors will continue to gain share; (b) prices will ultimately come under pressure; and (c) the pace of consolidation may be stalled. In our base case, Asian OEMs will grow by 18% through 2005, with Western brands growing by 3%.
• Tough Comparisons Next Year: We believe the market is underestimating how strong handset fundamentals are this year. Industry growth of 10%, flattish ASPs, and average operating margins of 12% in 2002 are all up significantly from last year. We believe comparisons will be tough for ‘03.
• Infrastructure Still Getting Weaker. We continue to see capex cuts in the US and Europe. We had expected that new network construction in China in 2H:03 could return the sector to growth. However, recent indications are that the 3G builds in China will not start until 2004, at the earliest.
• Seasonal Trade Nearing an End: Wireless Equipment group has appreciated by 11% in the last two months, with the large cap stocks up 21%, well above NASDAQ (up 9%) and the S&P500 (up 2%). We believe most of the stocks are embedding growth rates higher than our industry views.
• No Change to Relative Ratings: Our relative ratings and price targets within the US Wireless
Equipment universe remain unchanged. We continue to see the most upside potential in Motorola (MOT, $9.5, O, TP $11) and Nokia (NOK, $18.6, O, TP $19), and are cautious on Qualcomm (QCOM, $39.1, U, TP $27) and Ericsson (ERICD, $10.4, U, TP $5). |
