From the August 17, 1998 issue of Wireless Week
Asian Market Turmoil Hurts Wireless Stocks
Yen Weakens Amid Slowdown
By Bill Menezes
Jarring selloffs in global financial markets have focused wireless stock investors' attention on problem areas like Asia that could dampen future earnings growth.
A number of wireless service and equipment issues were pounded even more severely than the overall U.S. market in recent weeks because of growing speculation that currency and economic weakness in Japan would create harmful ripple effects in such wireless hot spots as China, Latin America and Europe.
Even such giants as Ericsson Inc., Nokia Corp. and Lucent Technologies Inc., which largely weathered the selloff of small-capitalization, higher-risk companies at the outset of Asian turmoil last year, raced the market lower as perceptions grew that risks had spread dramatically.
By the middle of last week those issues all were down from their 52-week highs by anywhere from 15 percent in the case of Nokia to a whopping 31 percent for Ericsson.
"Ericsson and Nokia got hit in particular, and it had a lot to do with fears about Asia," said Brian Modoff, wireless equipment analyst for BT Alex. Brown Inc. "They have a lot of meaningful revenues there, particularly in China. And rumors of currency devaluations always make the market nervous."
The latest catalyst for plunges in the world's major stock was weakness in the Japanese yen, which hit an eight-year low against the dollar amid fears that Japan's new government will be unable to reverse the nation's economic slowdown and reform its failing financial system.
Besides making foreign goods less competitive against Japanese-made products, the foundering yen raised speculation that neighboring China would have to devalue its currency. That could lead to a slowdown of the Chinese economy, an increasingly critical source of revenue for equipment makers.
Analysts also say that weaker conditions in Asia have prompted vendors to price their products more aggressively to make sales in stronger regions such as Europe and Latin America, hindering profits for themselves and their competitors.
"A year ago Digital Microwave [Corp.] and P-Com [Inc.] were supply constrained," Modoff said. "They certainly don't have that problem now."
Adding to the uneasiness was a virtual meltdown of Russia's financial markets, which saw the nation's stock market lose nearly 20 percent of its value just in the sessions of Aug. 10-11.
Both equipment manufacturers and service providers have suffered in the general market downturn that saw the venerable Dow Jones industrial average lose some 10 percent of its value just weeks after hitting an all-time high in July.
For some of the issues that began showing the negative impact from the Asian slowdown in second-quarter earnings, the recent selloff merely extended a sector bear market that dated back to last fall. Problems then in Thailand, the Philippines, Malaysia and South Korea have depressed shares of such vendors as P-Com, Powerwave Technologies Inc. and Andrew Corp. for months.
"For the most part, the reason they haven't been getting slaughtered recently is there hasn't been much left to do to them," Modoff said. "The mid- to small-cap wireless stocks have really had a rough go since October."
Getting the worst of it in the recent selloffs were the bigger infrastructure companies, which had rebounded after the initial crisis to hit all-time highs this year. Signs that the crisis affected even the more diversified companies were enough to rattle investors who had made significant profits in those stocks already.
For example, Ericsson in early August plunged from the 52-week high it reached in July after reporting a 27 percent second-quarter sales drop in Asia, its biggest market.
Service providers, until recently buoyed by consolidation that had bolstered stock prices in their sector, also suffered from the market's latest Asian flu.
The worst declines were among startup issues such as personal communications services stocks, which do not have the positive cash flow or earnings of established cellular operators.
While giant AirTouch Communications Inc., which is diversified among U.S. and foreign holdings, dropped 12 percent from its all-time high, PCS operators Powertel Inc. and Omnipoint Communications Corp. fell 44 percent and 46 percent, respectively.
"U.S. PCS stocks have severely underperformed the market," said Kevin Roe, wireless analyst for ABN-AMRO Inc. "It's more a reflection of market risk. The market risk of PCS stocks is magnified because there are no earnings and there is no positive cash flow."
"As the market turns and volatility increases, because the market risk and volatility of PCS stocks is greater, they magnify anything the market does," Roe said.From the August 17, 1998 issue of Wireless Week |
