Interesting article from thestreet.com relating networkers woes with recent Jabil miss. I'm not suppose to copy this here but I think it may explain todays weakness in the sector.
Top Stories: Are Jabil's Woes Bad
News for the Networkers?
By Kevin Petrie
Staff Reporter
3/18/98 5:07 PM ET
The networkers have stumbled into another patch of trouble,
but the mood among sector investors remains upbeat.
The problem is that customers have too many network
products to consider. And until these clients break open
their wallets, some networkers are responding by trimming
inventories or perhaps pushing back production orders.
On Tuesday evening, two companies revealed symptoms of
the market confusion. Component supplier Jabil Circuit
(JBIL:Nasdaq) says it is receiving fewer orders from
networkers for the spring and summer seasons, while
networker Bay Networks (BAY:NSYE) already is selling
fewer end products than it planned. This double-dose of bad
news has made some investors edgy.
Still, bulls haven't lost their faith in long-term industry growth
of 25%. And the new bearish evidence is a bit contradictory
-- Jabil looks poor this spring and summer while Bay
expects a nice bounce in the late spring.
Jabil got crushed Wednesday, dropping nearly 5 to 34
25/32. But the networkers managed to slither away, to a
degree. 3Com (COMS:Nasdaq) was off 9/16 at 33 1/2, while
Cisco (CSCO:Nasdaq) traded 7/8 lower at 63 9/16. Bay,
which lost ground late Tuesday after announcing bad news,
managed to crawl back to 26 3/8, near its pre-bad news level
of 26 3/4.
Jabil, which builds circuit board assemblies and other
electrical components for PCs, networking and other
industries, reported Tuesday evening that it beat its numbers
in the second fiscal quarter ended Feb. 28. But the company
expects revenue and operating income to be lower for the
next two quarters. Because the networkers Cisco and 3Com
make up an estimated 40% of its business, Jabil's news has
kindled fears that its problems speak for the networking
sector.
Analyst Martin Pyykkonen at CIBC Oppenheimer isn't
worried. He explains that networkers are waiting for
customers to choose among such technologies as
layer-three switching and conventional routing.
"You try to hold off your product commitments until you see
where your demand is strongest," Pyykkonen says. His firm
hasn't performed any underwriting for the companies he
discussed.
Pyykkonen estimates the networking industry's revenue will
grow at a 25% annual clip, with potential swings of five
percentage points from one quarter to the next. He says the
June quarter looks strong, while the September quarter
might feel the ordinary summertime sluggishness.
Bay Networks, a peer of 3Com and Cisco, confirmed
Tuesday evening that it won't make its numbers in the March
quarter because customers are juggling their choices. "It
seems like all the balls are up in the air at the same time,"
says CEO Dave House. He expects spending to rebound
somewhat in the June quarter.
One trader explains Bay's resilience Wednesday.
Institutional investors, convinced that Bay's new products
will sell robustly next quarter, were waiting to pounce on bad
news in order to buy the stock. They moved so quickly that
the buying opportunity vanished.
Jabil Circuits president Tom Sansone gave his take on
networking in a conference call Tuesday evening: "The
communications segment is expected to decline modestly
in the near term, due to lower production levels related to
transition into new products for some customers."
Sansone said Jabil's business will also be nipped because
some customers are trying to trim their large inventories of
finished products. This probably is 3Com, because Cisco
keeps very low inventories with Jabil. And the products that
turn quickly are still in high demand, according to Sansone.
"The aggregate production for the segment appears
positioned for flat levels of production in the summer, with
increases in the fall."
Communications made up 51% of Jabil's revenue in the
fiscal year ending Aug. 31, 1997, up from 30% the prior
year. An official at Cisco declined to comment on health of
its current quarter or its business with Jabil. A 3Com
representative did not return a call for comment. |
