Two articles from Briefing Com. One on RSTN, the other on NT and expectations for Comm market going forward. Do Reid and Jones have it about right? I think speculating where the action is, - RSTN and metro - is the way to go. Got a position in RSTN. Got a small one in NT, but I'm not sure I was thinking clearly when I did THAT.
biz.yahoo.com
:27AM Riverstone Networks (RSTN) 15.30: The timing is ironic. On the same
day Nortel (NT) warns, Salomon Smith Barney upgrades the shares of this
manufacturer of routers for service providers in the Metropolitan Area Network
(MAN). Salomon's main point is that the JDS Uniphase (JDSU) pre-announcement
bears little on the outlook for RSTN, and in fact, it simply reaffirms Salomon's
view that the metro, data networking and enterprise are the three themes that are
working. The JDSU warning shows weakness in long haul optical, not metro.
Also, it sees a considerable differential between the systems companies and the
components companies as systems companies are likely to show recovering results
long before the components companies. Also, RSTN's relative valuation looks
attractive as RSTN sells at a steep price to sales discount and well below Extreme
(EXTR) and ONI Systems (ONIS) on a p/e basis.....Briefing.com is a bit more
skeptical on RSTN. Nortel's warning is yet another example of an emerging theme.
All optical is weak, but it is the service provider/carrier side of the business that is
much weaker than the enterprise side. Extreme and Foundry (FDRY) recently
made positive comments at an investor conference, however, they are more
exposed to the enterprise market whereas Riverstone has more exposure to the
carrier side. Some of its larger customers are WorldCom (WCOM), Tellabs
(TLAB), Verizon (VZ). WCOM and VZ have spoken of reducing cap-ex spending
while TLAB recently was less than bullish at an investor conference. On the
positive side, RSTN is entering into a strong new product cycle with recent product
launches at SuperComm. Also, its Sonus partnership and Tellabs partnership are
reportedly delivering ahead of plan. Our opinion is based on the macro
environment and it's ugly out there. The company reports after the close on 6/20.
Salomon expects Riverstone to beat numbers despite the tough environment.
Nevertheless, it's difficult to get excited with cap-ex slowing for infrastructure
buildouts. -- Robert J. Reid, Briefing.com
9:18AM Nortel (NT) 10.60: The fact the Nortel warned today is certainly no
surprise -- many suppliers (PWAV, SPCT, JDSU) have warned in just the past
week, and the environment for carrier capital spending clearly remains dismal. But
the magnitude of the warning at Nortel is nonetheless staggering. Two numbers say
it all: revenues in the Dec qtr were $8.8 bln; expected revenues in the Jun qtr: $4.5
bln. That's a 49% plunge in six months. Unlike many other companies that have
warned recently, NT did not contribute to the market's optimistic expectations for a
quick recovery after the first half tech meltdown, as NT stated that "meaningful
growth" is not expected before the second half of 2002. We have been noting for
months that capital spending by carriers will quite likely continue to fall through
2002, which makes it very difficult for a company of NT's size and diversity to post
any growth over this time frame. Nortel has also read those tea leaves. In fact, the
company now calls this a period of adjustment rather than a downturn. That might
seem to be a word game, but that comment should not be overlooked. It is in fact,
the most critical piece of information in the warning. There are two ways to look at
Nortel's situation. You could believe that the $7.6 bln qtrly revenue rate of 2000 is
the baseline, and that the only question is when NT will return to that pace. Or you
could view 2000 as a bubble and assume that the baseline is closer to Q2's $4.5 bln
in revenues. CEO John Roth referred to a $4.8-4.9 bln revenue pace as the baseline
-- clearly he believes the business is undergoing a semi-permanent adjustment
lower rather than just experiencing a brief downturn. It is conceivable, even likely,
that NT will not see a $7.6 bln revenue pace for many years to come. We have
noted in the past that there is no reason to expect a recovery in the telecom
equipment market this year or next due to shrinking carrier capex plans. A time
will come when carriers again boost capex, but the recent trend has still been
toward lower capex through 2002 even by healthy incumbent carriers. If you're
looking to bottom-fish in this sector, wait about 9-12 months and then look for the
following: a wash-out of most emerging carriers and suggestions of rising 2003
capex plans by incumbents. It might not even happen in 2003, but at least there's
hope. It was time to give up on 2001 several months ago, and now it's time to give
up on 2002. NT is. You should too. - Greg Jones, Briefing.com
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