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Extreme, Enterasys Off After Analyst Downgrade
CHICAGO (Reuters) - Shares of Internet equipment makers Extreme
Networks Inc. (Nasdaq:EXTR - news) and Enterasys Networks Inc.
(NYSE:ETS - news) fell on Monday, following downgrades by Morgan
Stanley because of increasing competition and higher inventories.
Morgan Stanley analyst Christopher Stix said in several research reports
that San Jose, California-based networking giant Cisco may soon kick
off a price war in the Level 3 switch market to gain market share. For
that reason he downgraded his ratings for Extreme and Enterasys to ``neutral'' from ''outperform.''
He also mentioned that Foundry Networks Inc. (Nasdaq:FDRY - news), a stock that he does not
cover, would be affected.
Enterasys closed off 29.58 percent, or $3.86, at a new intraday year-low of $9.19 in New York
Stock Exchange (news - web sites) trading, while Extreme dropped 26.5 percent, or $5.95, at $16.50
in Nasdaq trading. Foundry finished down 6.29 percent, or 96 cents, at $14.30 on the Nasdaq.
Cisco's stock closed up 29 cents, or 1.75 percent, at $16.90 on the Nasdaq, and the American Stock
Exchange Networking index fell 1.69 percent.
``We believe Cisco could become more aggressive in pricing, particularly if it sees any meaningful
share loss to challengers Extreme Networks, Foundry Networks and Enterasys,'' Stix said in one
report.
Enterasys, based in Rochester, New Hampshire, and Extreme, in Santa Clara, California, declined to
comment.
One investment manager said the stock price declines were directly linked to the Morgan Stanley
downgrades.
``This is a time of year where there isn't a lot of research out there. There's so many people on vacation
and analysts are running out of things to say, so when there is a pretty significant downgrade, it can
really implode these stocks,'' said Tim Ghriskey, senior partner at Ghriskey Capital Partners, a
Greenwich, Connecticut-based investment management firm.
``These are both volatile stocks and a downgrade like this from a major firm like Morgan Stanley can
take them down when there aren't buyers out there to support them,'' he added.
Cisco chief executive John Chambers said earlier this month that the company does not plan to resort
to price wars to gain market share.
Stix cut his rating on Extreme, nonetheless, citing concerns about growth prospects in the Layer 3
switch market, expected to hit $4 billion this year, and a possible price war with Cisco.
Extreme is fairly valued at a price in the mid-teens, he said. He expects Extreme to meet his fiscal
first-quarter estimate of 2 cents a share on $116 million in sales. He also maintained a fiscal 2002
estimate of 18 cents a share, but cut his revenue forecast to $518.8 million from $540.1 million.
Stix said a fair value for Enterasys is $10 to $13 a share. He had initiated coverage of the stock on
Aug. 15 with a $16 price target.
Analysts on average expect Enterasys in the second quarter to earn 10 cents a share, with a small
range of 10 cents to 11 cents, according to market research firm Thomson Financial/First Call. Stix
expects the company to meet or beat its second-quarter expectations.
He cut his fiscal 2002 earnings estimate for the company to 35 cents a share from 42 cents, however,
and reduced his revenue estimate to $928 million from $980 million. He also cut his fiscal 2003
earnings estimate to 41 cents a share from 50 cents and reduced his revenue forecast to $1 billion from
$1.17 billion.
He said industry forecasts for Level 3 switch market growth of 20 percent this year, 28 percent next
year and 32 percent in 2003 are too aggressive and growth in the mid-teens to 20 percent is more
reasonable.
In his report about Enterasys, Stix said a build-up in inventory by the company's distribution partners
points to a challenging environment and raises concerns about future financial results.
Based on a series of checks, Stix said the distribution partners of Enterasys have increased product on
hand by almost 150 percent in the last week. He said he believes U.S. distribution inventories are in the
$90 million to $95 million range, or roughly 19 weeks.
Stix said management told him that inventories normally spike higher at this point in the quarter, as
distributors prepare for end-of-the-quarter shipments.
He added that Enterasys is offering special terms to move its products, leading him to believe the
company is pushing hard to meet fiscal second-quarter financial expectations. |
