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Last Update: 4:37 PM ET June 19, 2001
NEW YORK (CBS.MW) -- There were more words of doom for networking equipment stocks from the sell-side Tuesday as yet another analyst weighed in with a gloomy outlook for the sector.
This time it was Sanford Bernstein analyst Paul Sagawa's turn to take a swipe at the group, telling clients there was no relief in sight and that he expects the deluge of earnings warnings to continue.
Based on recent warnings from Nortel Networks, JDS Uniphase, Juniper Network, Nokia, and others, Sagawa now believes his forecast for an 11 percent decline in 2001 global telecommunications equipment sales may be optimistic. He has revised that projection to a 15 percent decline in 2001 and a further 6 percent fall for 2002.
"We believe that most equipment vendors will be forced to pre-announce poorer than expected sales and losses this quarter and to acknowledge that conditions show no sign of improvement," said Sagawa. "In particular, we believe that Ericsson, Motorola and even Cisco are at risk of failing to achieve consensus expectations for this quarter and the rest of the year.
According to analysts reporting to Multex, the consensus estimates are for a 5 cents a share loss for the second quarter and 10 cents a share loss for 2001 for Ericsson (ERICY: news, msgs, alerts) ; a loss of 12 cents a share for the second quarter and a 10 cents a share loss for 2001 for Motorola (MOT: news, msgs, alerts) ; and earnings of 2 cents a share for the fourth quarter and 41 cents for fiscal 2001 for Cisco (CSCO: news, msgs, alerts) .
The capital spending crisis seen in the United States in the first quarter of this year has intensified and spread to Europe, Sagawa noted.
And, as recent news from the group confirms, this is not a short-term issue.
He believes carrier spending growth will not bottom out until early 2002, not increase until 2003 and not hit a normalized rate of 10 percent or so until 2004.
Compounding problems, according to Sagawa, is the possibility of bankruptcies among long distance carriers.
"360 Networks' bond default suggests that new carriers may be closer to bankruptcy than we had predicted," said Sagawa. "The insolvency of one alternative long-distance carrier could set off a chain reaction of bankruptcies."
If this is the case, Sagawa thinks it's possible the second half of this year will be considerably worse than the first half as new carriers stop spending entirely and incumbents begin bargain shopping.
Because he thinks we are more than six months away from any meaningful inflection point in the communications equipment market and more than 18 months away from industry growth, Sagawa expects that year-end could provide better prices and less risk of downward revisions for most of the stocks in the sector. He recommends remaining "significantly under-weighted" in the group.
During this cyclical downturn, Sagawa is emphasizing "bargain valuations" (stocks that are more than 30 percent below normalized fair value) over market timing and short-term momentum swings.
For that reason, Sagawa said he prefers Nokia, Palm and Lucent, saying they have considerably more upside than downside. And despite recent price declines, Sagawa stressed that he would not invest in Nortel, Cisco, Motorola, or Ericsson because each offers too little upside relative to downside risks.
Sagawa said he also would be leery of highly valued smaller competitors such as Ciena, ONI Systems and Sonus Networks, which, he said, must take larger swaths of market share to maintain their growth. Most of these companies, he noted, have sales concentrated in a small number of customers, which increases the downside if one or more customers scale back spending.>>>
Namaste!
Jim |
