Recovery pushed back a year
Financial Post - Saturday June 16, 2001
By Steve Maich and Jason Chow
Second-half 2002: Nortel, JDS extend 'Nuclear Winter' for techs
Analysts are calling it a "Dead Zone" and "Nuclear Winter" but whatever the buzzword, the pain for telecommunications and technology stocks is far from over.
The pessimism among investors reached fever pitch this week as devastating earnings warnings from JDS Uniphase Corp. and Nortel Networks Corp. sent analysts scrambling to redraw their worst-case scenarios for the telecom and tech sectors.
That second-half recovery everyone was calling for is still in the cards, but sorry folks, now we're talking the second half of 2002.
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Misery by the numbers: How bad is it for Nortel? It earned US74¢ a share last year excluding acquisition costs. In January, John Roth, the chief executive, predicted profit of US81¢. Things have changed since then. Yesterday, Nortel said it expects to lose US48¢ a share excluding one-time charges in the second quarter alone.
With new disclosure guidelines in place and zero visibility, analyst forecasts are now all over the map for a full-year loss of anywhere from US17¢ to US94¢ a share.
The bigger worry now is a cash crunch and avoiding one means Nortel needs a quick return to profitability. Yesterday, there was a deep divide over what 2002 looks like, with calls ranging from a loss of US15¢ a share to a healthy profit of US70¢. Stay tuned, this is going to be a story with legs.
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Who's next? The severity of the situation described by both Nortel and JDS, plus a nasty earlier warning by Juniper Networks, has many investors bracing for another round of earnings warnings next week.
"Almost anything to do with telco or tech is definitely going to have to warn," said Brian Acker, president of money manager Acker Finley Inc. in Toronto. "You can't underestimate the significance of Juniper's warning. It had been a market darling, and if they're having trouble, then everything's on the table. Any sort of positive feeling in this area went out the door with Juniper."
Investors said they are now expecting such companies as Cisco Systems Inc., Sycamore Networks Inc., PMC-Sierra Inc. and Tellabs Inc. to admit that business is worse than they thought.
Ian Ainsworth, managing director of equities at Altamira Investment Services Inc., said he's also waiting for the shoe to drop at fibre-optic giants Corning Inc. and Lucent Technologies Inc., as well as electronics makers Altera Corp., Broadcom Corp. and Applied Micro Circuits Corp.
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Market Call: Buy Anderson! Research Capital analysts say the mood is getting bearish on energy stocks and so, of course, it's time to buy. The firm said all factors pointed to a continued bull run.
Why? Oil prices will hold in at the US$26 a barrel level, production growth and a weak Canadian dollar will offset lower gas prices, and valuations remain compelling as some energy stocks are trading at less than three times projected cash flow.
The report also said the consolidation phase is "far from over" and said another big $5- to $10-billion takeover remains likely: "Could it be Anderson at $45?" Research Capital's top three recommendations were Anderson Exploration Ltd. (AXL/TSE) (which it projects will post a 75% return over the next 12 months), Canadian Natural Resources Ltd. (CNQ/TSE) (52% projected return), and Ketch Energy Ltd. (KCH/TSE) (64% projected return).
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Market Call II: Wi-LAN Inc. has lost another fan, at least in the short term. CIBC World Markets analysts Todd Coupland and Barry Richards dropped their call on the stock (WIN/TSE) yesterday to "hold" from "speculative buy." They had been hoping for revenues this year of $50-million but have now cut estimates to between $20-million and $25-million after delays to network rollouts.
While expressing concerns over Wi-LAN's ability to get adequate financing, they said Wi-LAN still has a "very strong growth profile" for the next three to five years.
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Market Call III: Technology still sucks, so where's an investor to go now? Merrill Lynch says the backdrop for bonds is improving and it is boosting its recommended bond exposure to 30% from 25%. Stocks fall from 70% to 65%, while cash remains at 5%.
While some pundits were ready to give up on the prospect of any more rate relief in the United States, Merrill strategists are now looking for another 50 basis points to bail out what is still an ugly economy.
"We look for a long, hot summer before better times re-emerge toward year-end as U.S. monetary and fiscal stimulus kick in," says David Rosenberg, Merrill's top economy and market watcher in Canada.
Merrill still believes cyclicals have another big rally brewing but that's on hold until earnings expectations pick up. In the meantime, they told clients yesterday: "Our tactical strategy is to move back into rate-sensitives like the banks, pipelines, real estate and selected defensives. Energy remains our top pick." As for tech bottom-fishing? Forget it, says Merrill. "We have been underweight technology all year long and feel no reason to change this view."
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Adding it up: Analyst Chris Umiastowski of Yorkton Securities likes JDS Uniphase (JDU/ TSE; JDSU/NASDAQ) but dropped his target US$5 to US$20 this week to reflect soured sentiment. How did he come up with that target? Start with an earnings forecast of US65¢ a share for fiscal 2003, add a price-earnings growth ratio of 1.3 and a growth level of 30% and you get US$25.
But what's soured sentiment worth? Mr. Umiastowski then applied a "discount" to come to a more reasonable target.
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Good call: A few analysts can claim to have seen this latest mess coming.
A week ago, Bear Stearns analyst Wojtek Uzdelewicz projected a US30¢ a share loss this year at Nortel. What looked like an exceptionally bearish call just eight days ago is now looking like it might be a tad optimistic.
Mr. Uzdelewicz and Thomson Kernaghan analyst Richard Woo also both correctly predicted that Nortel would have to cut more jobs to trim its bloated costs. Nortel said it will fire another 10,000 workers by September, bringing its total job cuts to about 30,000 or almost one-third of its workforce, this year.
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