Stability signs offer hope for U.S. telecom sector
Tuesday October 28, 2:04 pm ET
By Ben Klayman
CHICAGO, Oct 28 (Reuters) - Signs of stability among telecommunications equipment companies suggest the worst may be over in the long-struggling sector, although analysts stopped short of predicting a full-blown recovery any time soon.
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Lucent Technologies Inc. (NYSE:LU - News) and Corning Inc.'s (NYSE:GLW - News) return to profitability combined with stabilizing sales and rising profit margins at rival companies have helped drive the American Stock Exchange Network index (AMEX:^NWX - News) up more than 80 percent so far this year.
But analysts don't expect a recovery in telecommunications spending until 2005 as many phone companies still face declining demand for traditional voice lines and intense competition from cable operators.
"A lot of the bubble froth has been gone for a while now," said Bill Kornitzer, portfolio manager with USAA Investment Management.
It's been a harsh two and a half years for gear makers as excess network capacity, built during the heady days of the Internet boom, and slack customer demand forced phone companies to slash spending.
Spending by North American carriers has declined two-thirds since 2000 to an estimated $33.5 billion this year, according to Smith Barney.
Suppliers responded by cutting jobs and selling assets even as they racked up losses totaling millions or even billions of dollars. Since the end of 2000, the U.S. telecom industry has announced almost 650,000 job cuts through the end of September, according to outplacement firm Challenger, Gray & Christmas.
But last week, Lucent posted its first net profit in more than three years and forecast flat to slightly higher sales in the current quarter.
"There's another hallelujah," Barbara Rishel, senior portfolio manager with MTB Investment Advisors, said of Lucent's results. "The telecom equipment sector is bottoming."
Corning posted its first profit in more than two years and said its telecom business, which accounts for about half its sales, had largely stabilized.
Others that spoke of stability in telecom spending included Canada's Nortel Networks Corp. (NYSE:NT - News; Toronto:NT.TO - News), fiber-optic components maker JDS Uniphase Corp. (NasdaqNM:JDSU - News), Britain's Marconi Corp. (London:MONI.L - News), Tellabs Inc. (NasdaqNM:TLAB - News), Juniper Networks Inc. (NasdaqNM:JNPR - News) and Redback Networks Inc. (NasdaqNM:RBAK - News)
The real winners next year will be in specific technologies like Internet voice transmission, high-speed Internet and optical products used in metro areas, coming at the expense of more traditional products, analysts said.
"It's going to be cannibalization, one technology growing at the expense of another," said CIBC World Markets analyst Steve Kamman, who has the sector rated "underweight."
Analysts laud stocks like Juniper, larger rival Cisco Systems Inc. (NasdaqNM:CSCO - News), France's Alcatel (Paris:CGEP.PA - News; NYSE:ALA - News) and Advanced Fibre Communications Inc. (NasdaqNM:AFCI - News) because they offer products in growth areas. |
