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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (8156)	10/16/2000 10:54:08 AM
From: T L Comiskey	Respond to of 65232

Monday October 16, 10:43 am Eastern Time Region of the Day: Cross-Atlantic Storm in Tech Sector Richard Thomson, Columnist The slide in the US tech sector has washed over Europe's IT hardware firms. And the outlook isn't good. When the US sneezes, Europe catches a cold, runs the old cliché. But clichés often contain an uncomfortable nugget of truth, and there could hardly have been a more graphic illustration of this one that the trauma in the European information-technology (IT) hardware sector over the last few days. The sector has slumped a full 30% in the last five weeks. Gloomy news from big US companies - Lucent (NYSE:LU - news), Cisco (Nasdaq:CSCO - news), Motorola (NYSE:MOT - news) and others -- sent comparable European stocks crashing like pins in a bowling alley. Nokia (NYSE:NOK - news), Alcatel (NYSE:ALA - news) and Ericsson (Nasdaq:ERICY - news), three stars of the sector over the last few years, went down with the rest. There is probably a re-rating going on among US IT and telecom stocks, and it is reasonable to assume that the same is starting to happen in Europe. If prudence is the better part of valor, the valiant investor will stay away from the sector for the foreseeable future. Wind Dying in the Sales The gist of what the US companies were saying was that sales are slowing, or were soon likely to slow, because the markets for their products are growing mature. This popped the blithe assumption that demand would continue to grow more or less indefinitely into the future. Although the European companies are trying to put a more optimistic face on the future, the stock market is coming to the conclusion that they are just as vulnerable. Take Nokia, the Finnish mobile-phone giant. It has some plausibly bullish arguments. For instance, the build-out of third-generation mobile-phone network infrastructures will provide huge new business over the next few years. At the same time, the increasing technological complexity of the so-called 3G Internet-enabled cell phones will make them about twice as expensive as current models. That will reverse the trend towards lower margins on phones, which has been a threat to profits recently. And so on. Market All Wet? But the cell-phone market in Europe, with nearly 60% penetration, is growing saturated, which means slowing sales in the near future. Nokia's sales growth of 40% to 50% a year is starting to look simply unsustainable. The new technology carries higher costs with it as well as higher profit margins, and greater risks, too, since no one yet knows how well these new 3G phones will actually work. Expanding sales to the high-growth markets of Latin America and China will take up some of the slack but intensifying competition from Japanese and US companies will take the edge off its profitability for everyone. As Motorola warned of weaker business, naturally Nokia's shares slid in sympathy to 37.65 euros, their lowest level since December. Techno Remixes Ericsson, the Swedish mobile-phone company, is in a similar jam. Its handset business is not as successful as Nokia's, yet faces the same problems. Its network-systems business is better than Nokia's, but increasing competition from the Finnish company may drive down prices for both of them. Meanwhile, Alcatel, the French equivalent of Lucent, continues to insist that sales in at least some of its divisions will rise by a healthy 30% in the third quarter of this year. But that can't divert the market's suspicions that it will suffer from the same problems of slowing demand for optical systems, circuit switching and other techno-wizardry that, until only a couple of weeks ago, investors saw as watertight business. Therefore it was not too surprising to see Alcatel's shares drop 10% to 68.70 euros after Lucent issued its profit warning. Short-Term Rise, Long-Term Fall The shares of these companies may bounce back somewhat in the next few days as investors try to pick them up cheap, but their long-term direction is probably down. The truth is that they are too expensive for the more cautious investment environment that is emerging. Nokia and Alcatel shares, for instance, are still trading at prices that are around 55 times this year's expected earnings. Historically, that is very high for any company. It also makes both companies among the five most expensive shares in the Stoxx 50 index of international stocks. It's always shocking to see high-flying sectors of the market take a dive. But arguably, these shares were heading for a fall anyway. .