SmartMoney.com - Common Sense
Telecom Equipment Has a Pulse
By James B. Stewart
Tuesday February 26, 4:55 pm Eastern Time
COULD THERE BE life in telecom equipment?
Investors could be easily forgiven for turning their backs on the once highflying sector. Even when it seemed the news couldn't get any worse, it did. Global Crossing (OTC:GBLXQ - news) went into bankruptcy; Qwest (NYSE:Q - news) and WorldCom (NASDAQ:WCOM - news) suffered post-Enron (Other:ENRNQ) accounting allegations and credit reviews; Nortel Networks (NYSE:NT - news) and Corning (NYSE:GLW - news) issued even more depressing forecasts. It's hard to find a telecom-equipment stock trading in double digits. If there's a more despised sector, I can't think of it.
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Whatever happened to broadband and all that it promised? I confess to considerable sympathy for investors who've been burned in this area, since I'm one of them. I've recommended companies in the sector from time to time, and even though I waited until these names were way off their peak prices, I'm still looking mostly at losses. These didn't seem like reckless or especially risky investments at the time. Unlike many dot-com start-ups, these were companies with solid earnings, growing profits and long-term reputations. You can't get much more blue chip than Corning. Hardly anyone predicted the shocking fall-off in revenue and profits, or realized that these companies had been operating in an Oz-like world of venture-capital-fueled unrestrained spending on telecom. The telecom buildout of the late 1990s now seems like an amazing misallocation of capital, something that's not supposed to happen in a free-market economy. I suspect economists will be scratching their heads for years.
But that doesn't change the fact that boom turned to bust with dizzying speed, leaving many investors holding the bag. Yet, I often keep wondering, was everybody really so far wrong about the immense promise of fiber-optic connections? If not, there might be some remarkable bargains in this sector.
So I perked up this week at reports of merger activity in the telecom-equipment industry. This was hardly front-page news, not with teams of reporters still crawling over the carcass of Enron. But on Monday, Ciena (NASDAQ:CIEN - news) announced that it is acquiring ONI Systems (NASDAQ:ONIS - news) in a stock swap valued at $850 million, and Andrew Corp. (NASDAQ:ANDW - news) said it would buy a former Lucent Technologies (NYSE:LU - news) unit, Celiant, for $470 million in cash and stock. Ciena is a leader in long-haul optical switching, and ONI concentrates on fiber-optic connections in local markets, the so-called ``last mile.'' Celiant and Andrew make transmission amplifiers, with Celiant focusing on wireless products. Somebody, it seems, thinks there's value to be had in the sector.
So there's at least a pulse. But what really caught my attention was the last paragraph in the New York Times account, which quoted ONI Chief Executive Hugh Martin. According to Martin, four large international carriers have been testing ONI equipment and one of the regional bells said it will buy it. One reason ONI agreed to Ciena's merger proposal is because it will have to ramp up production so dramatically, and potential customers were looking for the deeper support that a Ciena could provide. ``They said ONI will have to train 1,000 people in two quarters if selected. You can imagine if a company our size had to train all those people in two quarters, that would be a very ambitious task,'' Martin told the Times.
In other words, ONI seems to be facing greater demand for its products than it can accommodate on its own. It needs to hire more people. If Martin is right, and if ONI gets this magnitude of orders, then this is more than a pulse: This is a hospital patient about to jump out of bed.
You can certainly test this theory with very little money, since both Ciena and ONI stocks trade in single digits. Or, if you're like me and already own small positions in these companies, you can dramatically lower your average costs. Most Wall Street analysts, like everybody else, hate these stocks. After all, they were recommending them a little over two years ago when they were both selling for more than $100 a share. But they strike me as a good way to bet on a longer-term recovery, and I plan to add to my positions in both. At $16, Andrew is a little more expensive, and it isn't as far off its high of nearly $40 a share. But if you believe, as I do, that there's a future in wireless communications, Andrew represents an intriguing opportunity. |
