SoundView Tempers Photonics Outlook, Speculates on Cisco
8/30/99 Following increased interest in optical networking companies after Cisco
Systems (San Jose, CA) laid out $7.4 billion in stock for Cerent Corp. (Petaluma,
CA) and Monterey Networks (Richardson, TX), SoundView Technology Group
(Stamford, CT)) managing director Kevin Slocum advised clients to pull back from
aggressive investment positions and offered guidance on Cisco's move.
Slocum downgraded his ratings on San Jose, CA-based optical component
vendors JDS Uniphase and E-Tek Dynamics from "Strong Buy" to "Buy." The
analyst maintained "Strong Buy" ratings on both Optical Coating Laboratory
(OCLI, Santa Rosa, CA) and Corning Inc. (Corning, NY).
Slocum's move follows two years of zealously bullish sentiment on optical
components companies in the face of their high valuations. But the ever-growing
valuations, coupled with concerns over business plan execution and priced-in
Y2K advantages that translate into competition with non-photonics sectors for
capital, give Slocum pause. "We are left believing that the [photonics] group is
ripe for a short-term pull back and therefore recommend trimming positions," he
advises in a research brief.
"We expect most investors to object to our reduction given that it is based upon
price, in part because we haven't cared about price for months and in part
because they like to see fundamental risks stand behind rating reductions,"
Slocum acknowledges. "One of the things we like to see in a stock or group is at
least a bit of a wall of worry. Corning seems to have one built around the threat of
over-capacity in fiber and the strength of its relationship with Lucent for optical
amplifiers. [At OCLI], investors fret over the non-optical businesses and the
sequential decline in backlog last quarter."
Cisco and DWDM
Slocum also offered clients a favorable take on the Cisco news (see Optical
Networking Space Rocks with $7.4 Billion in Cisco Acquisitions), and joined in
the speculation of what the data networking giant will do to fill the dense
wavelength division multiplexing (DWDM) hole left open by the acquisitions. "
Cisco will ultimately sell its own products to [the DWDM] market segment as
opposed to the partnership situation it currently describes," Slocum predicts.
On whether Cisco purchases a start-up such as Corvis (Columbia, MD) or
established player like Ciena (Linthicum, MD), Slocum offers less certain
guidance. "Do you come with a next generation technology that indeed might be
better and try to displace the incumbent or do you buy a strong number three ($
volume) with established customers and turn it into number one," he posits. "We
know what our vote is, but we're not Cisco."
Shares of Ciena stock jumped on the Cisco news due to speculation that Cisco
will buy a DWDM company and the high prices Cisco is paying for the
companies it is acquiring, Slocum observes. "Our bottom line on [Ciena] is that
fundamentals are improving and that spending in the area is going to remain
strong for the foreseeable future. The company has diversified its product line,
done the same with its customer base, and will soon reach a quarterly revenue
run rate that will allow a material return to profitability," he advises. Despite Ciena
management's talk of price pressure, the company generated over 50%
incremental gross profit margins in the latest quarter over quarter period, Slocum
notes. "We remain bullish on Ciena," he concludes.
|
