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JULY 10, 2003
By Olga Kharif Too Many Calls for Telecom-Gear Stocks? [Page 2 of 2] LONG-TERM HANDICAP? One other element of support -- government spending -- could also arrive later than expected. Washington, which plans to build its own optical telecom network using Internet protocal (IP) routers, recently delayed awarding contracts valued at up to $900 million for the project's initial two years. Thus, the telecom-equipment industry won't see a revenue lift from that spending until early next year, instead of in late 2003 as originally expected, according to Lehman Bros. The other vulnerability is that these stocks have risen faster than the industry's profits. Take Lucent Technologies (LU ): Since 2001, it has cut its operating expenses by 75% and eliminated 67,500 jobs -- some 64% of its workforce. But while its stock has climbed 30%, to $2, over the past three months, Lucent has yet to return to profitability. And its now-slimmer product line could put it at a disadvantage to competitors, says Sam Greenholtz, a principal at consultancy Telecom Pragmatics in Westminster, Md. In fact, many equipment makers have cut their research and development significantly, which could hurt their performance long-term, says Michael Mahoney, portfolio manager for a $100 million technology hedge fund at EGM Capital in San Francisco. Nortel Networks (NT ), whose stock Mahoney holds, has slashed its R&D by 16%, to $489 million a quarter, over the past nine months. STRONG BUT PRICEY. Take it all into account, and most mutual-fund portfolio managers are either dumping their shares in phone-equipment makers or restricting their investing to the few companies that are stable and profitable. For instance, many funds continue to hold shares of networking giant Cisco Systems (CSCO ), which still sells mostly to corporations but is expected to grab a larger share of the phone-carrier market over the long haul. Cisco is also in a strong position to win some of the upcoming government contracts, believes Levy. However, its stock, which is trading at around $17.50, is pricey -- only 8% off the 52-week high it hit on June 19. Alternatively, it might make sense to invest in companies in parts of the industry that seem likely to turn up first. Mahoney likes Adtran (ADTN ), which supplies equipment to the broadband market. In fact, its core business in DSL gear is already expanding. Problem is, Adtran's stock is trading at $54.65, only 3% below its 52-week high of $56.25 in mid-June. Many investment companies, such as EGM, also hold shares in Nortel, which has won a number of new contracts in the past several weeks. On June 25, it announced that it will provide equipment to No. 2 U.S. wireless provider Cingular Wireless. And Nortel is expected to post a profit this year for the first time since 2000. Its shares are trading at $2.95, down 17% from the 52-week high they hit at the beginning of June, thus creating what could be a buying opportunity. A TURNING TIDE? Other portfolio managers, including Reza Samahin, co-manager of the Altamira Science & Technology and E-business funds, favor Lucent. At the end of May, it floated $1.525 billion in convertible bonds. Samahin says that strengthened Lucent's capital structure, which has been a primary worry for investors. Still, he suggests that investors not buy the stock until it falls below its current price of $2. Of course, some experts still regard telecom-gear makers and their stocks as too risky. "I'm not sure that at any price we'd hold any of these stocks," says Peter Hofspra, senior investment analyst at the $113 million AIC Diversified Science & Technology fund, which does own shares of Cisco. "There's no history of management that has proven it can run a business." Others feel a bit more optimistic. For the equipment makers, business "from here on will just get better," says Jeff Kagan, an independent telecom analyst. "There might not be a dramatic upturn in orders, but the tide is turning. It's just a matter of time before it lifts all ships." He agrees, however, that the coming upturn's strength may not justify the run-up in telecom-equipment stocks so far. Which means the industry may once again take its revenge on investors who imagined a future that seemed almost too good to be true.
 Kharif covers technology for BusinessWeek Online from Portland, Ore. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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