To: Johnny Canuck who wrote (40336 ) 11/11/2003 4:53:32 AM From: Johnny Canuck Read Replies (1) | Respond to of 71088 Recovery seen for wireline networking Sector poised for fundamental recovery: Morgan Stanley By Susan Lerner, CBS.MarketWatch.com Last Update: 1:59 PM ET Nov. 10, 2003 NEW YORK (CBS.MW) -- Many stocks have climbed in 2003, to be sure, and now Alkesh Shah believes the time might actually be right for the wireline networking equipment sector on a fundamental basis. Thus far, the Morgan Stanley analyst noted, shares have been driven higher by improved sentiment despite weakening fundamentals. But he believes fundamentals in the data networking and wireline equipment industry have reached an i nflection point and are poised to turn positive. Shah indicated that the firm's October survey of chief information officers points to 2 percent growth in 2004 information-technology budgets with more than half of the respondents indicating expectations that IT spending would be flat to 10 percent higher next year. Shah expects network equipment to be a winner as spending increases. "The early read from our most recent CIO survey indicates network equipment spending is a key priority among CIOs within 2004 IT budgets and should receive a larger portion of budgets than in 2003," Shah told clients. The analyst believes wireline capital expending in the fourth quarter could be up by as much as 11 percent sequentially over the seasonally weak third quarter, but for 2004 he's forecasting higher North American wireline capital s pending even if overall budgets are "flattish." Although he said he remains concerned about valuation, Shah upgraded his industry view to "in-line" from "cautious" while also realigning his individual recommendations on a nu,mber of stocks in the group. "Our valuation work indicates that the stocks are not inexpensive at current levels, but we believe that improving fundamentals could drive shares toward our best-case sc enario, which indicates 12 to 20 percent upside," said Shah. Within the sector, Shah upgraded Tekelec (TKLC: news, chart, profile) and Polycom (PLCM: news, chart, profile) to "overweight" from "equal-weight" and Tellabs (TLAB: news, c,hart, profile) to "equal-weight" from "underweight." However, he also downgraded both Sycamore Networks (SCMR: news, chart, profile) and Concurrent Computer (CCUR: news, chart, profile) to "underweight" from "equal-weight." Shah noted that a combination of Polycom's strong fundamental position, financial results and outlook, and relatively attractive valuation have consistently kept the stock near the top of his ranking analysis. , Meanwhile, he said, he thought Tekelec was poised to benefit from wireless local number portability and packet telephony deployments and Tellabs, which has lagged the group year-to-date, was now poised for performance that was in l ine with the group. Conversely, Sycamore and Concurrent came in at the bottom of Shah's rankings. ",We believe optical networking demand is bottoming in 2003 and a modest rebound appears likely for 2004. However, Sycamore's solutions are best suited for new network builds as opposed to upgrade contracts, pushing top-line growth further into the future," he said. As for Concurrent, Shah called the stock's valuation "stretched" and said that although fundamentals should improve in 2004, Concurrent was likely to lag the competition. , "We expect Concurrent to capture meaningful video-on-demand wins at Comcast and Adelphia but to continue lagging the video-on-demand revenue of primary competitor SeaChange (SEAC: news, chart, profile)." In afternoon action, Tellabs stock was better by 3.4 percent to $7.82, while Tekelec was up 2.3 percent to $17.03 and Polycom added 2 percent to $20.13. Sycamore slumped 7.3 percent to $5.60 and Concurrent dropped 5.7 percent to $,,is ,a reporter for CBS.MarketWatch.com.