SG Cowen disagrees with downgrade
SG Cowen analyst Christin Armacost disagreed with Morgan Stanely Dean Witter's
downgrade of Redback and Juniper. While telecommunications companies may reduce their
capital spending on switches for traditional voice communications, spending on equipment for
the transmission of data is likely to remain strong, she said. Unlike Nortel and Lucent, Juniper
and Redback have no exposure to the market for voice equipment, she said.
"I still think carrier spending will be concentrated on the data side rather than legacy voice,"
Armacost said. "Juniper and Redback maintain some the highest growth opportunities out there
and the potential to significantly exceed earnings expectations."
Telephone companies have spent billions of dollars to upgrade their networks to handle the
exploding volume of data traffic created by the Internet and corporate intranets. As a group,
the local and long distance telephone companies Armacost tracks experienced a 32 percent
increase in revenue from data traffic in the third quarter versus the same period last year.
Capital spending by U.S. telephone companies rose 38 percent this year to $110 billion from
$79.5 billion, according to the telecommunications research firm RHK in South San Francisco.
RHK forecasts that U.S. phone carriers will spend $133 billion next year, which would be a 21
percent increase over this year. Spending on traditional voice switching equipment is expected
to remain flat at $10 billion.
Merrill Lynch analyst Michael Ching on Monday made positive comments about phone
companies' expected spending on capital equipment, saying that investors may be placing too
much emphasis on inventory levels at the networking equipment makers.
"Our service provider team continues to forecast a modest decline in capital spending in 2001,"
Ching said in a research note. "However, recent news suggests that spending ultimately may
come in ahead of initial forecasts, as it usually does. Recently, both Sprint and Global Crossing
made positive comments on their calendar year 2001 capex plans."
"We continue to believe that aggregate service provider spending in the U.S. will actually grow
about 10 percent in 2001, and that our companies will report an average revenue increase of
25 percent next year," Ching added. "Despite this, the average price-earnings multiple of our
group is now approaching levels last seen in 1997-98."
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