Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : JDS Uniphase (JDSU) -- Ignore unavailable to you. Want to Upgrade?

To: pat mudge who wrote (12509)	9/6/2000 10:23:23 AM
From: DownSouth	Respond to of 24042

Don't worry. I haven't even considered springing $210 for that report. I just found it interesting. I was hoping someone else might have a few gems of wisdom from such reports.

To: pat mudge who wrote (12509)	9/6/2000 10:11:33 PM
From: Glenn McDougall	Read Replies (2) \| Respond to of 24042

WorldCom Downgrade Offers More Evidence of Telecom Spending Slowdown By Scott Moritz Staff Reporter 9/6/00 6:54 PM ET thestreet.com Wednesday brought more evidence of a coming slump in communications-equipment spending, in the form of a WorldCom (WCOM:Nasdaq - news) downgrade. Lehman Brothers telecommunications-services analyst Blake Bath Wednesday cut the lagging stock to outperform from buy, citing a long-distance telephone revenue slowdown in the face of sharply rising industrywide capital spending. The resulting earnings slump will force WorldCom and its competitors to cut back on spending, the analyst suggested. The news isn't bad only for the big telecoms, though it was plenty bad for WorldCom, which lost 6% Wednesday. A pullback by the biggest spenders on telecom equipment could easily ripple through the networking sector, where shares have rocketed in the last year as investors rallied around the accelerating global network buildout. With the entire sector, from Cisco (CSCO:Nasdaq - news) on down, seemingly priced for perfection, any slowdown could result in a big pullback in networking shares. Unsustainable? According to the Lehman report, the telecom-services industry next year will spend one dollar on capital equipment for every two dollars it generates in revenue. That marks a dramatic increase from 1996's 1:5 ratio, and this year's 1:3. While at first blush this rising tide of spending seems like good news for the equipment sector, Bath calls the 1:2 ratio unsustainable. With competitive pressures rising and long-distance revenue dropping, big-spending telecom companies such as WorldCom, AT&T (T:NYSE - news) and Sprint (FON:NYSE - news) inevitably will have to cut back on capital spending. Those decisions are likely to undercut the heretofore insatiable demand for telecom-networking gear, punishing the stocks that have benefited from that demand. WorldCom didn't have an immediate comment. Lehman advised the Jackson, Miss., company on its merger with MCI. Other Issues The spending pullback isn't the only problem for the networkers and the small network builders they often serve. Also complicating matters, in a number of ways, are the weak share prices of most telecom-service companies. And, just as the companies' interlocking relationships -- as supplier and customer, shareholder and financier - mutually boosted their fortunes in sunny times, a shakeout could lead to a vicious wave of selling. WorldCom, for instance, isn't alone among giant telecom outfits in trading at recent lows. Sprint, SBC Communications (SBC:NYSE - news) and Verizon (VZ:NYSE - news) are all trading at 1998 levels, and AT&T has actually fallen to a price last seen in 1997. To address their weak share prices, these companies have either created or planned to create tracking stocks that give investors a chance to benefit from their fast-growing units. These units operate in sexier areas of telecommunications, such as wireless and data services. As the large, established phone companies cut themselves up, the smaller start-up telcos do the bleeding. Bath estimates the megacap telcos will create some $60 billion worth of tracking stocks or carveouts over the next six months. That's $60 billion that won't fund new companies because, as these spinoff shares flood the market, fewer dollars will shake down to the new network builders. The Ice Age As TheStreet.com examined two weeks ago, new network builders such as Williams Communications (WCG:NYSE - news) have already begun to feel the funding squeeze. Williams is $1 billion short of its capital-spending budget. With its shares trading below their IPO level and the company having recently tapped the junk bond market, Williams found it needed to take the extraordinary measure of selling part of its portfolio of networking investments to pay for new equipment and network expansion. The Williams situation serves as a warning for the market's current darling, the red-hot optical-networking sector. New network builders are the prime customers of the new network-equipment vendors, such as Sycamore (SCMR:Nasdaq - news), Ciena (CIEN:Nasdaq - news), Corvis (CORV:Nasdaq - news) and ONI (ONIS:Nasdaq - news). They are also, in Williams' and Broadwing's (BRW:NYSE - news) case, investors in these companies. To be sure, spending projections continue to be strong. But as more evidence of a cooling trend streams in, a wildly optimistic outlook and incredibly rich networking company valuations will be harder to sustain. Send letters to the editor to letters@thestreet.com. Read our conflicts and disclosure policy. Order reprints of TSC articles. Regards, Glenn