Headline: Investor Fears Grow That Once-Hot Telecom-Gear Sector Has Cooled
By Stephanie N. Mehta, Staff Reporter of The Wall Street Journal
Concerns are growing that the once-booming market for telecommunications equipment is slowing.
Northern Telecom Ltd. warned this week that it will record lower-than-expected third- and fourth-quarter revenue. That revelation, along with French gear maker Alcatel SA's disclosure a few weeks ago that it won't meet 1998 earnings expectations, has fueled fears that the entire industry is cooling-and it has led many investors to drop companies that were considered white-hot just months ago.
In New York Stock Exchange composite trading Wednesday, Nortel shares continued to slide, plunging $3.8125, or 11%, to $32.0625. Rival Lucent Technologies Inc. saw its shares fall $5.25, or 7%, to close at $69.25. Motorola Inc. shares slid $1.6875 to close at $42.875. And Alcatel's American depositary shares fell $1.0625, or 5.9%, to $17.
Many analysts believe the Nortel and Alcatel disclosures underscore broader problems for the industry. Continued consolidation among telephone companies-the equipment makers' main customers-could lead to reduced capital spending. The big boom in wireless infrastructure spending, prompted by the deregulation of the U.S. cellular industry, is beginning to slow. And some of the most promising overseas markets for gear makers, Asia and Latin America, are roiled by economic woes.
"It's going to be harder for the entire industry to sustain growth rates," said Nikos Theodosopoulos, an analyst with Warburg Dillon Read. Mr. Theodosopoulos Wednesday downgraded his rating on Nortel to a "hold" from a "buy," and also lowered ratings on three smaller equipment makers. "Investors really need to focus not on all boats rising, but on companies that are gaining market share."
That's a change from a year ago, when the telecommunications-equipment sector was the darling of Wall Street. Investors believed that deregulation of U.S. and European markets would create huge opportunities for equipment makers as new carriers sprung up and existing phone companies rushed to upgrade their networks to fend off the upstarts. The shift to Internet-based networks, away from traditional telephone systems, was seen as an additional factor driving equipment spending.
Gear makers insist that those opportunities still exist. Richard McGinn, chairman and chief executive officer of Lucent, said businesses and consumers remain hungry for phone lines, Internet connections and other telecom services, prompting spending by Lucent customers.
"We're seeing carriers are moving forward and making investments to take advantage of the opportunities and enhance their positions," Mr. McGinn said Wednesday in an interview. He added that he "is not uncomfortable" with analysts' fiscal 1998 estimates of about $30 billion in revenue and earnings of about $1.70 a share for the Murray Hill, N.J., company. Lucent was spun off from AT&T Corp. two years ago and has been a favorite of investors ever since.
Lucent executives dismissed fears of a capital-spending slowdown by customers. "We are engaged in very detailed planning discussions with service providers all over the world," said Carly Fiorina, president of the company's global service provider business. "The primary demand is strengthening over time, not weakening."
But even widely held Lucent isn't impervious to worries about a slowdown in the overall gear market. The stock is down 36% from its 52-week high of $108.50 a share. Wednesday, investment firm BT Alex Brown lowered its rating on Lucent to "market perform" from "buy," and Warburg Dillon Read's Mr. Theodosopoulos lowered his price target on the stock, citing concerns about the overall outlook for the industry.
In a research note in late September, Alex Brown predicted that the telecom equipment sector would grow a paltry 4% in 1999, compared with 13% growth in 1998. The firm's analysts warned of flat capital spending by the big, incumbent telephone companies. Indeed, an Ameritech Corp. spokesman said Wednesday that the company expects 1999 capital spending of about $3 billion, "about the same" as this year's.
Emerging carriers, meanwhile, such as the competitive local carriers, aren't likely to offset slower spending by the big guys. Local phone competition hasn't taken off as quickly as some had predicted, resulting in less spending by new players.
Yet many investors and analysts remain optimistic about the sector. After all, concerns about spending by phone companies cropped up at this time last year, only to be dispelled.
Even skeptics concede that there remains a strong opportunity for gear makers that can help carriers install systems based on Internet technology to transmit huge streams of voice, video and computer data. However, those equipment makers will have to contend with stiff competition from computer-networking players such as Cisco Systems Inc. and Ascend Communications Inc.
"The question is whether the catalysts that cause carriers to spend are still around, and I think the answer is yes," said Alex Cena, an analyst with Salomon Smith Barney. "This is definitely more of a speed bump than a pothole."
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