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

To: stockman_scott who wrote (45047)	12/11/2001 6:45:34 PM
From: Sully-	Read Replies (1) \| Respond to of 65232

Sector Patrol An Early Touch of Froth By Roben Farzad December 11, 2001 EVERYONE KNOWS THE 1990s Internet boom is long gone, and actually still unwinding through a violent shakeout. And yet telecom networking stocks are soaring. Since Oct. 1, Cisco (CSCO) and Ciena (CIEN) have doubled, Juniper (JNPR) has nearly tripled, and Lucent Technologies (LU) and Nortel Networks (NT) have surged 40% and 62%, respectively. Question is: Does this portend a return to the high-spending, hypergrowth go-go 1990s? Probably not. Telecommunications-carrier spending, the mother's milk for networkers like Cisco and Nortel, shows no signs of a major recovery, much less a return to the bubbly levels seen in 1999 and 2000. According to telecommunications consultancy Optical Oracle, carrier capital spending, or capex, surged by an unheard-of 250% between 1997 and 2000, as Baby Bells and small upstart carriers eagerly deployed the billions of dollars they raised in the debt and equity capital markets to build out their networks. But last fall, as the upstarts began dying en masse, spending plummeted. Dresdner Kleinwort Wasserstein's Ariane Mahler estimates that U.S. telecom capital spending declined by 21% this year — and she projects another 21% fall next year. SoundView Technologies is even more bearish, forecasting as much as a 30% decline in U.S. capex next year. Paul Sagawa, the highly regarded Sanford Bernstein networking analyst, doesn't see any sort of turnaround until at least the second half of 2002. In the meantime, he expects a famished fourth quarter, largely because carriers had already spent nearly 81% of their 2001 budgets before the quarter began (leaving just 19% to be stretched over 25% of the calendar year). The 15% to 18% quarter-over-quarter dip Sagawa expects this quarter will lead to earnings warnings or misses from some equipment makers. Already, optical components maven JDS Uniphase (JDSU) warned Monday that the slowdown has not abated, with March-quarter sales expected to dip 10% to 15% from its latest quarter. JDS's shares, like Cisco, have nearly doubled since their Sept. 21 lows. Optimists like to dwell on today's remarkably low interest rates, which keep down the cost of capital at established carriers with solid credit ratings and could entice them to ramp up equipment orders. Baby bells like Verizon (VZ) and BellSouth (BLS) would seem to fit that bill. But low interest rates don't much help the scores of teetering competitive local exchange carriers that remain shut out of the capital markets and are more concerned with preserving cash to stave off bankruptcy than raising funds to fuel expansion. Indeed, interest rates have been attractive for months, and no capital-spending boom has ensued. In fact, what we've seen in 2001 — and can expect more of in 2002 — is the very antithesis of the building frenzy of the late 1990s: recession-minded carriers making do with what they already have. Tech data firm Giga Information Group predicts in its 2002 telecommunications outlook that "providers will focus [primarily] on augmenting their existing service portfolios — in particular, endeavoring to make [them] more attractive on a price/performance basis…. Truly new service introductions will be rare." Giga also foresees customers avoiding telecommunications investments that have payback periods of longer than a year. This reluctance on the part of carriers to develop new services is bad news for equipment makers. "I don't see any big technological catalyst next year," says Fulcrum Global Partners' Imran Khan. Khan thinks that 2004 seems like a better target for another spending boom, as companies begin to migrate to next-generation networks that offer more fluid and less error-prone data transmission. Against this backdrop, networking-stock valuations seem awfully frothy. Equipment titan Cisco now trades at 95 times expected 2002 earnings, compared with the Standard & Poor's 500's 2002 price/earnings multiple of 23. And burned tech investors, of all people, know how unreliable earnings expectations can be. When Cisco hit its all-time high of $80 in March 2000, analysts expected the company to post a 70-cent profit for 2001; it ultimately eked out 41 cents. Ditto for Canadian rival Nortel, whose summer 2000 peak of $84 assumed $1.64 in 2001 earnings — not the $1.05 loss it is all but certain to register. When the actual results of these and other networkers began to differ from their lofty expectations, their stock valuations plummeted. With the gap between stock valuations and earnings performance beginning to widen once again, you have to wonder if another fall is far behind. yahoo.smartmoney.com