I agree with the potential of this meltdown scenario...!
And the implications for the broader market moves after early January 2001.
Check the earlier work of Justin Mamis
Message 14634158
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ottawacitizen.com
Fibre-optic shakeout looms:
Study forecasts stock meltdown for likes of JDS in early 2001
Jeff Pappone
The Ottawa Citizen
Investors riding out the latest technology stock meltdown better hold on tight because market forces have the fibre- optic industry careering toward a full-scale "train wreck," predicts telecommunications analyst Susan Kalla of New York's BlueStone Capital Partners.
In a 26-page study of the fibre- optic industry, Ms. Kalla forecasts an enormous market shakeout looming for companies such as JDS Uniphase by early 2001.
"You will see some hints of a slowdown in the fourth quarter of this year," she said. "But, by the first quarter next year it will be obvious, and it will be ugly."
While a network-building spree doubled fibre networks across the U.S. and Europe in the past two years, this aggressive expansion by long distance operators' created a surplus of capacity that has led to deep rate cuts for services.
The result will be reductions in capital spending by telecommunications carriers that will translate into earnings disappointments and slowing orders for the fibre industry, possibly leading to layoffs at manufacturing plants.
"(Telecommunications carriers) don't buy unless they can achieve a greater than 50-per-cent cost benefit or they have to upgrade to compete," Ms. Kalla said. "So, without new competition, you enter a status quo period where the players don't have to do anything."
The predicted slowdown period may last until 2004, she added.
While he agreed that companies such as JDS face some daunting scenarios, Toronto analyst Brian Piccioni, of BMO Nesbitt Burns, isn't about to predict layoffs or wreckage on the tracks.
"The way the stock market works is that if Cisco Systems stumbles, then everyone gets whacked," he said. "Expectations are so high that if Cisco doesn't continue to surprise by exactly one penny every quarter, then the stock sells off to the tune of 50 per cent in a matter of days."
While small changes in a company's results often cause a disproportionate swing in stock prices, it doesn't point to a faulty business model, Mr. Piccioni said.
"There are some definite signs that a slowing is going on -- there's not a clear future and maybe the share price is representing the uncertainty," Mr. Piccioni said. "But, there is a difference between the stock market reaction and the performance of the company."
Ms. Kalla agreed, saying the poor market performance of companies such as JDS doesn't reflect a flawed strategy.
"There's nothing that the management has done with execution that would differentiate them -- the management has done a good job and the company is running on all cylinders," she said. "But, you can't overcome the forces of nature."
Mr. Piccioni predicted a slowdown in capital spending is more likely than an increase, primarily because the cost of capital -- interest rates, high-yield bond yield, access to financing from vendors or financial institutions, and the ability to issue equity -- has gone up.
Jay Patel, senior analyst with the Yankee Group of Boston, Massachusetts, agrees there are external forces exerting downward pressure on growth, but he doesn't see a huge sag for the sector.
If expenditures come down to a choice between upgra-ding telephone polls and installing cost-effective fibre, Mr. Patel feels most telecommunications companies would elect for the network upgrade.
Mark Zohar, director of telecommunications for Cambridge, Massachusetts' Forrester Research, said he expects a temporary 12- to 18-month "plateau" until the market straightens itself out.
"The threat is that if the entire telecom sector continues to be in disfavour with Wall Street and it has an impact on capital expenditures, then we might see a slowdown," said Mr. Zohar.
Ms. Kalla believes revenue growth in the fibre-optics industry will level out at a more sustainable range of 30 to 35 per cent, with surviving stocks returning to an earnings growth of about 30 per cent annually.
But Mr. Patel reminds that almost any company would be extremely pleased with a 35- per-cent annual growth. So, even if the outlook isn't as rosy as it once was, compared to many industries, fibre-optics offers solid returns, he said.
The expected slowdown will end four years of rapid growth marked by soaring profits and exponential share prices.
With 40 competitors jumping into the market after telecommunications deregulation in 1996, large carriers built their fibre-optic networks to keep pace, fuelling the exponential growth for components makers and systems integrators.
"There was panic because many companies didn't want to be left out of the fibre-optic train and part of the demand over the last year was inflated," said Mr. Patel. "Now those fears are gone, and it's going to be much more balanced without the shortage worries." |
