Telecom equipment stocks:
Proceed with caution, analyst says
By Binti Harvey, CBS MarketWatch
Last Update: 12:23 PM ET Sep 15, 1998
NewsWatch
Shares of telecommunications equipment manufacturers stumbled Tuesday
morning following a more cautious outlook from an analyst at Warburg
Dillon Read.
Analyst Nikos Theodosopoulos expressed concern about the group's
1999 earnings outlook in light of workforce reductions by large
companies, deteriorating economic conditions in Asia and South America,
earnings warnings from telecommunications companies and suppliers, and
the inability of new carriers to raise capital.
In the latest sign of problems for the sector,
Northern Telecom (NT) said Monday it will cut
3,500 jobs, or about 4 percent of its workforce.
"A major reduction like this, we believe, reflects a
more prudent level of spending given the
organizations of the company and perhaps a more
cautious view on emerging markets,"
Theodosopoulos said in a research note.
Telecommunications equipment shares were
mostly lower Tuesday. Lucent (LU) fell 2 3/8 to
74 1/2, Cisco (CSCO) fell 11/16 to 93, Reltec
(RLT) fell 1/8 to 12 1/4 and Alcatel (ALA) fell 5/8 to 34 13/16.
Latin worries
Growing uncertainty in Asian and South American economies will likely
trim profits for telecommunications equipment makers in 1999, according
to Theodospoulos. He is increasingly concerned that slowing capital
spending in China and South America will also add to weakness caused
by the Asian financial crisis. More on Latin America.
Theodospoulos notes that in order to offset any additional damage in the
industry's growth markets, business in Europe and North America must
continue to be strong.
According to Theodosopoulos, several recent
events indicate the industry may be headed for a
slowdown. He cited earnings warnings by Ciena
Corp. (CIEN), Reltec Corp. and Sanmina Corp.
(SANM), which sells contract manufacturing
services to the industry.
Capital markets
Theodosopoulos also expressed concern that the
rapidly-growing new telecommunications carrier
market may encounter trouble raising capital amid
declining stock prices.
With the exception of Lucent Technologies Inc. and Cisco, the
telecommunications equipment group is experiencing its lowest P/E
multiple since 1993.
"We believe this uncertainty has resulted in new lows in forward P/E
multiples with most stocks in the group now trading at under 20 times
estimated 1999 earnings..." said Theodosopoulos. "Given the new low in
P/E, we believe the stocks may already reflect the potential earnings
uncertainty." |
