Fiber Optics Cos Take Beating; Street Sees Slow Recovery
By JOHNATHAN BURNS
Of DOW JONES NEWSWIRES
NEW YORK -- Fiber optics systems and component makers continued to take a pounding Wednesday, and some on Wall Street believe the pressure won't end for some time.
Shares of systems market leader Nortel Networks Corp. (NT) and component leader JDS Uniphase Corp. (JDSU) hit new 52-week lows, while upstart switch-maker Corvis Corp. (CORV) and fiber and broadband access equipment maker ADC Telecommunications Inc. (ADCT) barely hovered above their lows.
The damage was widespread. Optical systems maker Ciena Corp. (CIEN), which lost $23.19 a share Tuesday after announcing a dilutive acquisition, had recently dropped another $7.50.
The selloff came on both a hangover from the Federal Reserve's decision Tuesday not to lower interest rates and concerns brought about by Foundry Networks Inc.'s (FDRY) fourth quarter profit warning.
The switch maker said Tuesday that it would earn between 11 cents and 14 cents a share, below First Call's estimate of 24 cents, on cutbacks in capital spending in the communications infrastructure sector.
The warning spooked a market already worried about spending by communications companies, causing the selloff to spill into the fiber optics sector.
"There is definitely a lot of negative sentiment in the market," said Tom Lauria, telecommunications equipment analyst with ING Barings. "And there is still some downside in this market."
He said that many on Wall Street had long assumed that startup phone companies and Internet service providers would continue to receive funding for aggressive buildout plans. However, within the last few months capital markets have become frigid.
"We don't have that working assumption anymore," Lauria said.
Early Wednesday, Lauria cut his rating on Nortel to buy from strong buy, saying that he could not see the company's revenue rising 30% in 2001 due to a greater-than-expected decline in circuit switching.
Meanwhile, shares of Ciena continued to slide after it announced intentions to buy Cyras Systems Inc. for about $2.6 billion. The deal is expected to shave 19 cents to 22 cents a share off Ciena's fiscal 2001 earnings, which had been expected to be 70 cents.
Lehman Brothers telecommunications equipment analyst Steve Levy said Tuesday's selloff in Ciena's shares reveals the changing philosophy of the street.
"It seems like we may be going back to an environment where earnings matter," he said.
Obviously, a reduction of interest rates will relieve a lot of sell pressure across the entire market. But telecommunications equipment makers - even in the explosive sector of fiber optics - will remain under pressure until carriers show that spending is not declining rapidly.
"This industry is not going away," Lauria said. "I think there's fundamentally good value in a lot of these companies. The truth is, most companies move up too much, and go down too much. We'll have to wait for signs of a better economy and solid carrier spending levels next year."
-By Johnathan Burns, Dow Jones Newswires; 201-938-2020; johnathan.burns@dowjones.com
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