SSB on opticals
Telecommunications Equipment
With NT/Cisco Prereleases Cutting Ests On EXTR,NT,FDRY-Rating On SCMR
February 16, 2001 SUMMARY
* Given the prereleases from Cisco and now Nortel, we
B. Alexander are cutting estimates on several companies and
Henderson realigning our ratings to reflect a more difficult
backdrop and to reflect the shift in the relative
positions of the companies within the industry to the
Timothy Anderson shifting conditions.
* Cutting estimates on Foundry and Extreme Networks as
well as on Nortel.
Daryl Armstrong * Lowering our rating on Sycamore to a 2H, outperform
rating.
* Strongly reiterating our belief that its a superb
time to be snapping up the highest quality names in
the Data Networking And Optical Systems market
including Nortel, Cisco, Ciena, Juniper, ONI Systems,
and Extreme Networks.
* We think the sharp economic downdraft is reflected
in stocks and now believe we have fully rationalized
our estimates to reflect conditions.
* We believe this category will be Tech leadership as
economy eventually recovers latter this year.Price
targets cut for CORV,EXTR,FDRY,SCMR.
SUMMARY VALUATION AND RECOMMENDATION DATA
Earnings Per Share
Company (Ticker) Price FYE Rating Target LTGR Current Yr Next Yr
CIENA (CIEN) $76.81 Oct Curr 1H $145.00 40% $0.73E $1.15E
Prev 1H $145.00 40% $0.73E $1.15E
Corvis Corporation- $16.50 Dec Curr 1S $24.00 60% ($0.21)E $0.05E
(CORV) Prev 1S $40.00 60% ($0.21)E $0.05E
Cisco Systems Inc- $29.38 Jul Curr 1H $65.00 35% $0.65E $0.85E
(CSCO) Prev 1H $65.00 35% $0.65E $0.85E
Extreme Networks- $37.88 Jun Curr 1H $60.00 50% $0.45E $0.80E
(EXTR) Prev 1H $110.00 50% $0.50E $0.90E
Foundry Networks- $15.19 Dec Curr 1H $24.00 35% $0.60E $0.95E
(FDRY) Prev 1H $30.00 35% $0.70E $1.10E
Juniper Networks- $89.38 Dec Curr 1S $200.00 50% $0.81E $1.00E
(JNPR#) Prev 1S $200.00 50% $0.81E $1.00E
Nortel Networks Corp- $29.55 Dec Curr 1H $50.00 30% $0.68E $1.10E
. (NT) Prev 1H $60.00 30% $0.98E $1.25E
ONI Systems (ONIS#) $47.75 Dec Curr 1S $95.00 60% ($0.13)E $0.22E
Prev 1S $95.00 60% ($0.13)E $0.22E
Sycamore Networks- $26.31 Jul Curr 2H $30.00 50% $0.23E $0.32E
(SCMR) Prev 1H $35.00 50% $0.23E $0.32E
WITH NORTEL PRERELEASE FOLLOWING CISCO'S, WE ARE CUTTING ESTIMATES ON NORTEL,
EXTREME AND FOUNDRY AND CUTTING OUR RATING ON SYCAMORE
After the close, Nortel Networks sharply lowered their expectations for
revenues and earnings for 2001. Management cited sharply weaker economic
conditions, tight fisted spending patterns among service providers, and a
stretch out of the capital budgeting decision process. Nortel specifically
noted the rapid erosion in the outlook over the last several weeks. After
the Cisco guidance reduction last week, we started working on cutting our
estimates on a number of companies, we had expected to have a little more
time to do the work. Nortel has pulled forward our decision making time
frame. Over the last several days we have discussed the outlook with the
bulk of the companies under our coverage and we are making the following
changes:
* Ciena: We Continue To Aggressively Recommend Ciena's Shares. Ciena
reported a superb Jan 01 quarter with clear traction on its LH transport
products and growing visibility with the CoreDirector line. Even the
Cyras product appears to be making progress. We continue to strongly
recommend CIEN shares and consider these shares to be top among our picks
along with ONI and Juniper.
* Corvis: We Are Cutting Our Price Target Again And Thought Long And Hard
About Our Rating But In The End Decided To Remain At A Buy. Corvis
scorched the most recent quarter and increased guidance. However, we are
nervous about the companies ability to hit the numbers in the second half
without the help of several new contract wins. However, in our opinion,
they don't just need contract wins this year, they need them soon. We
think it will take considerable time to execute a field trial post any
contractual agreements and we think this is making the back half look
increasingly challenging day by day. In an environment where service
providers are reluctant to commit and where the decision process can
stretch out seemingly indefinitely, we think the risk profile of Corvis
continues to increase. Corvis believes they can win contracts without
field trials and get the revenues in a timely fashion. We think this may
prove more challenging than management expects. We are trimming our
target price on Corvis to reflect these concerns and uncertainties. Our
new target price of $24 is predicated on 11 times forward revenues by the
end of 2001. We see considerable opportunity to become more aggressive if
Corvis can bring down several large visible contracts.
* Cisco: We Continue To Aggressively Recommend Purchase Of Cisco's Shares.
We think the perfect call would have been to upgrade CSCO from a Hold to a
Buy on Wednesday of last week. With Cisco's sharp guidance cut, we think
the stock has finally reached its cyclical nadir. Going forward, we
expect CSCO to hang in during tough periods and to out perform in
improving periods. The time to buy a quality name such as Cisco is during
the economically weak period at the beginning of the new economic cycle.
The stock market has come down sharply from its highs, its been
forecasting an economic slowdown. The inevitable is upon us. But so are
rate cuts. and the rate cuts will likely drive stocks higher long before
the impact shows up on the P&L statement.
* Extreme Networks: We Continue To Aggressively Recommend Purchase Of
Extreme Shares But We Are Trimming Our Revenue And Earnings Estimates
Moderately To Reflect The Weaker Conditions And Longer Sell Cycles.
Given the commentary out of Cisco and Nortel pertaining to the rate of
fall off in business, we think its unlikely Extreme will be able to
completely dodge the bullet. This is particularly true since Extreme
reported so early in January that it may not have had the opportunity to
see the slowdown Cisco captured with their highly accurate IT systems and
January ending quarter. While there was risk of another round of estimate
cuts, we have been hesitant to recommend these shares near term. With
this estimate cut, we feel we have cleared the decks and can once again
fully recommend these shares. We are rationalizing our target price to
reflect the recent pressures. At our new price target of $60, Extreme
would be selling at 100 times 2001 estimates, but at only 62 times forward
earnings by the end of 2001.
* Foundry Networks: Cutting Estimates. Similar to Extreme, we think the
visibility has eroded for Foundry accordingly we are reducing our
estimates for 2001 to $0.60 per share from $0.70 and for 2002 to $0.95
from $1:10. Based on the lower estimates, we are also edging our target
price lower to $24 per share, a valuation of 40 times 2001 estimated
earnings and 25 times 2002. We think these shares are very inexpensive at
current prices at the economic trough and we are affirming our Buy rating,
however, we think there is little urgency to step up to the plate on these
shares given the low visibility.
* Juniper Networks: Strongly Reiterating Our Buy Recommendation And
Reaffirming Our Estimates. We think these shares are exceptionally
attractive given the bedrock visibility to the earnings outlook. Juniper
is one of the few companies that is seeing no material slowdown in demand.
Its position at the core of the network is crucial to service providers.
We are nervous about the 2Q product cycle, but we think there's enough
strength in the fundamentals to weather this transition. We think this
will set up a spectacularly strong 2H 2001. Juniper remains, along with
Ciena and ONI, one of our top picks.
* Nortel Networks: Cutting Our Earnings Forecasts, But Strongly Reaffirming
Our Buy Recommendation--We Think Nortel Will Hit Its Cyclical Trough
Valuation Today. With the earnings preannouncement, we think Nortel will
hit its cyclical trough valuation level over the next several days.
Accordingly, we think this presents an outstanding opportunity to step up
to the plate and purchase one of the premier telecom and optical equipment
companies. Despite the estimate cuts, we are strongly reiterating our Buy
rating on NT shares. For more information on NT, please refer to the
note we are posting today on their prerelease.
* Sycamore Networks: Cutting Rating To Accumulate 2H From 1H--Contrast With
Ciena's Results Concerns Us. We have several concerns with Sycamore.
First, Ciena appears to be winning the recent battles for market share in
the optical switch market. The sharp contrast between Ciena's superb
quarter and the faltering results and lowered guidance at Sycamore make
this point hard to ignore. Second, we heard discouraging commentary from
a number of service providers about their experiences with the Sycamore
products. The Sycamore software is developing a reputation of being
difficult to integrate with other vendors equipment. Additionally, we
think Sycamore is in desparate need of a meaningful contract win, yet the
tough conditions may make this difficult to achieve over the next several
months. Moreover, we think service providers are looking to take
advantage of their suppliers in this weak period and may be holding out
for better pricing and other concessions. All in all, we think Sycamore
needs to improve visibility, demonstrate traction with its new SN 16000
switch and its SN 3000 metro access product. Our new $30.00 price target
represents 13.8 times estimated 2001 revenues.
QUARTERLY ESTIMATES PER SHARE DATA
Current Year* Next Year Next Year + 1
Ticker Period Current Previous Current Previous Current Previous
CIEN 1Q $0.18A $0.18A $0.24E $0.24E NA NA
2Q $0.17E $0.17E $0.27E $0.27E NA NA
3Q $0.17E $0.17E $0.29E $0.29E NA NA
4Q $0.21E $0.21E $0.34E $0.34E NA NA
Year $0.73E $0.73E $1.15E $1.15E NA NA
CORV 1Q ($0.06)E ($0.06)E ($0.01)E ($0.01)E NA NA
2Q ($0.06)E ($0.06)E $0.00E $0.00E NA NA
3Q ($0.06)E ($0.06)E $0.02E $0.02E NA NA
4Q ($0.04)E ($0.04)E $0.03E $0.03E NA NA
Year ($0.21)E ($0.21)E $0.05E $0.05E NA NA
CSCO 1Q $0.18A $0.18A $0.18E $0.18E $0.24E $0.24E
2Q $0.18A $0.18A $0.21E $0.21E $0.27E $0.27E
3Q $0.14E $0.14E $0.23E $0.23E $0.28E $0.28E
4Q $0.14E $0.14E $0.24E $0.24E $0.34E $0.34E
Year $0.65E $0.65E $0.85E $0.85E $1.10E $1.10E
EXTR 1Q $0.08A $0.08A $0.16E $0.19E NA NA
2Q $0.11A $0.11A $0.19E $0.21E NA NA
3Q $0.12E $0.14E $0.21E $0.24E NA NA
4Q $0.15E $0.17E $0.23E $0.26E NA NA
Year $0.45E $0.50E $0.80E $0.90E NA NA
FDRY 1Q $0.13E $0.16E $0.20E $0.24E NA NA
2Q $0.14E $0.17E $0.23E $0.26E NA NA
3Q $0.15E $0.18E $0.25E $0.28E NA NA
4Q $0.17E $0.20E $0.27E $0.31E NA NA
Year $0.60E $0.70E $0.95E $1.10E NA NA
JNPR# 1Q $0.19E $0.19E $0.23E $0.23E NA NA
2Q $0.20E $0.20E $0.24E $0.24E NA NA
3Q $0.21E $0.21E $0.25E $0.25E NA NA
4Q $0.22E $0.22E $0.28E $0.28E NA NA
Year $0.81E $0.81E $1.00E $1.00E NA NA
NT 1Q ($0.04)E $0.16E $0.17E $0.24E NA NA
2Q $0.15E $0.23E $0.25E $0.29E NA NA
3Q $0.22E $0.24E $0.26E $0.30E NA NA
4Q $0.34E $0.34E $0.42E $0.41E NA NA
Year $0.68E $0.98E $1.10E $1.25E NA NA
ONIS# 1Q ($0.08)E ($0.08)E $0.04E $0.04E NA NA
2Q ($0.06)E ($0.06)E $0.04E $0.04E NA NA
3Q ($0.02)E ($0.02)E $0.06E $0.06E NA NA
4Q $0.02E $0.02E $0.08E $0.08E NA NA
Year ($0.13)E ($0.13)E $0.22E $0.22E NA NA
SCMR 1Q $0.06A $0.06A $0.06E $0.06E NA NA
2Q $0.06E $0.06E $0.07E $0.07E NA NA
3Q $0.05E $0.05E $0.09E $0.09E NA NA
4Q $0.06E $0.06E $0.10E $0.10E NA NA
Year $0.23E $0.23E $0.32E $0.32E NA NA
Jack |
