The trouble with telecom
Some wireless companies really are on the comeback
trail. But don't make broad bets on the group.
November 26, 2002: 4:18 PM EST
By Paul R. La Monica, CNN/Money Staff Writer
NEW YORK (CNN/Money) - Is the telecom rally of the
past two months, dare we say it, for real? Yes and no.
Telecom equipment companies have soared since the market
hit its low point on Oct. 9. Lucent (LU: Research, Estimates)
is up nearly 175 percent while Nortel (NT: Research,
Estimates) has soared 223 percent.
But money managers say they're not convinced that these
companies, and other networking firms, can keep their
momentum going. Ciena (CIEN: Research, Estimates), Juniper
Networks (JNPR: Research, Estimates) and Redback Networks
(RBAK: Research, Estimates) have all seen their stock prices
more than double as well.
"Overcapacity still exists and we'll
probably see another year of that. In
2004, things will finally get better,"
says Abel Garcia, co-manager of the
AIM New Technology and AIM Global
Science and Technology funds. He
does not own Lucent or Nortel.
Jaye Morency, manager of the DLB Technology fund, adds
that stocks like Lucent and Nortel have made such big moves
simply because the worst-case scenario for them has not
played out, not because of any fundamental improvements.
"It's a sigh of relief that they are not going bankrupt," says
Morency, who does not own Lucent or Nortel either.
But it is not all doom and gloom in telecom. There does finally
seem to be some good news for a select group of wireless
companies. On Monday, Gartner Dataquest announced that
global cell phone sales in the third quarter jumped 7.8 percent
from a year earlier.
Also Monday, semiconductor company Intel announced a price
hike in flash memory chips, which are used in cell phones. The
company cited strong demand for cell phones as one reason
for the price increase.
Looking good for Nokia and Qualcomm
With that in mind, Nokia and Qualcomm, which develops the
code division multiple access (CDMA) wireless technology used
by wireless carriers such as Verizon Wireless, Cingular, and
Sprint PCS, might continue to rally.
"The handset market is beginning a recovery. Consumers are
interested in new phones with color and digital displays," says
Greg Teets, an analyst with A.G. Edwards. The firm has not
done investment banking for any of the telecom companies he
follows but Teets does own some shares of Nokia. Teets has
a buy rating on Nokia (NOK: Research, Estimates) and
Qualcomm (QCOM: Research, Estimates).
But Teets says investors should steer clear of the wireless
carriers themselves. He says that even though cell phone
sales will probably be brisk in the fourth quarter due to the
holiday shopping season, most of the new handset sales will
be to existing wireless subscribers looking to upgrade their
phones, not new customers.
Morency agrees. She owns Nokia and Qualcomm in her fund
but thinks the run-up in the stocks of carriers is overdone.
AT&T Wireless (AWE: Research, Estimates), for example, is
up 138 percent since Oct. 9 while Sprint PCS (PCS: Research,
Estimates) has soared nearly 200 percent. Morency says that
the six major wireless carriers in the U.S. are continuing to
cut prices aggressively in order to attract new customers.
That will make it tough for any of them to be profitable, she
notes.
To be sure, Nokia and Qualcomm have enjoyed a nice run as
well during the past few weeks. Each is up about 50 percent
since Oct. 9. But both companies are profitable and the
valuations are fairly reasonable despite their recent moves.
Nokia trades at 23 times earnings estimates for 2003, with
earnings expected to increase 14 percent annually over the
next three to five years. Qualcomm trades at 35 times
estimates for this fiscal year (ending in September 2003) and
analysts expect earnings to increase 21 percent over the next
few years.
But what about Motorola, the second largest wireless handset
maker? Shouldn't it also be a good buy now if cell phone sales
are on the rise? Ted Parrish, co-manager of the Henssler
Equity fund says that he sold Motorola shares a few months
ago because the company is still having problems in its
semiconductor business. "They have really made a nice
comeback in handsets but other businesses are pulling the
stock down," Parrish says.
Parrish says there are other ways to play the recovery in the
cell phone market though. He likes companies that are
supplying chips to handset makers. So he owns Intel (INTC:
Research, Estimates) and Texas Instruments (TXN: Research,
Estimates), which makes digital signal processors. |
