Cisco warning dampens network sector
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LOS ANGELES, April 16 (Reuters) - A stark warning from
Cisco Systems Inc. on Monday threatens to freeze the
first buds of investor optimism on the network equipment sector
since a sharp downturn began six months ago, analysts said.
Cisco, which dominates the market for core routers and
other equipment that drive data communication on the Internet,
said earnings for its third-quarter closing this month would
fall far short of expectations.
That warning from the market leader extinguished a rally in
other network equipment stocks, which had posted their
strongest gains as a group over the past week since they began
turning lower last October.
Shares in Juniper Networks , Ciena Corp. ,
Sycamore Networks , Redback Networks and JDS
Uniphase Corp. all tumbled in after hours
trade on Monday, partially reversing last week's rallies.
Analysts said the Cisco warning flips the whole sector back
on the defensive.
"I think it is probably a sign of more negative news to
come from other companies and a reflection that the global
economy is definitely weakening. It is obviously very serious,"
said Tom Lauria, an analyst at ING Barings.
Cisco, which is famed for its ability to track customer
demand in something close to real time, warned that the
slowdown in capital spending that began in the United States
shows signs of spreading to Asia and Europe.
Cisco also projected that sales for its fourth quarter,
ending in July, could fall as much as 10 percent from the
already depressed levels of the current quarter. The company
tempered even that warning by saying all forecasts remain
"subject to more variability than normal."
MORE SOMBER MOOD
"I would expect the mood to be a little more somber now,"
said Richard Shannon, an associate analyst at Epoch Partners.
"Cisco's probably the best placed to get that visibility before
anyone else."
Juniper Networks Inc. , the number two maker of
high-speed router hardware and one of the few companies that
has managed to take business away from Cisco, saw its shares
tumble by four percent in the wake of the warning.
Shares in Juniper surged by 49 percent last week, the
largest gain in percent terms since they began trending lower
in October 2000.
Other equipment makers also headed into Cisco warning after
double-digit gains of their own in the past week: Ciena had
rallied 63 percent last week, Redback saw a gain of 38 percent.
One key factor for the sector now and the return of
investor confidence is where Cisco shares find support,
analysts said. Cisco lost almost eight percent after its
warning Monday, taking the stock down to $15.87.
It has traded as low as $13.19 over the past year.
Epoch Partners now estimates Cisco's fair value at closer
to $10.5, assuming that it takes until October 2002 for the
networking leader to regain its historic growth levels.
That would put Cisco back on track to earn 43 cents per
share. Assuming a price-to-earnings multiple of 30 would yield
a share price of $13. Discounting that to present value takes
fair value to near $10.5, about 39 percent below Monday's
Nasdaq close, Shannon said.
REUTERS
Rtr 22:39 04-16-01 |
