For Subscribers

Get the complete article now!

The Wall Street Transcript Publishes Communications Equipment Industry Issue

Three leading analysts and top management from 23 Communications Equipment firms examine the Communications Equipment sector in the latest issue of The Wall Street Transcript (212/952-7433) or http://www.twst.com/info28.htm

In a vital review of this sector for investors and industry professionals, this valuable 130-page Special Issue features:

1) Investing in the Communications Equipment Industry - In an in-depth Analyst Roundtable (15,300 words), Cristin Armacost, Senior Vice President of Telecommunications Infrastructure with Tucker Anthony Cleary Gull, Kenneth Leon, Global Sector Head with ABN AMRO and Luke Szymczak, First Vice President in the Equity Research Department of Prudential Securities examine the influx of venture capital funding in the sector, IPOs, rapid technology changes, niche growth opportunities, globalization, cable modems, DSL, access concentrators and subscriber management systems.

The expert panel analyzes the future of broadband optical, transport, switching, enterprise and service providers, valuation issues, cap ex spending, data/voice issues, cellular outlook, carrier system future, M&A activity, regulatory horizon, the outlook for the sector and shares specific stock recommendations.

Leon explains, "Our industry, if you were to zoom out and look at it over 30 years starting in 1975, has moved from analog to electronic. And just in the last few years, we're moving from electronic to optical. So Lucent and Nortel, as well as other companies, are deploying optical end-to-end solutions, but they do need the raw materials from JDS Uniphase (Nasdaq:JDSU), SDL (Nasdaq:SDLI), Harmonic (Nasdaq:HLIT) and Ortel (Nasdaq:ORTL). Optical does have two strong benefits to service providers. Number one, it increases bandwidth and efficiency. Two, it reduces cost substantially. We have seen optical broadband most widely deployed so far in long-haul networks, that would be long distance, whether it's U.S., submarine, or Europe. Optical deployment will eventually move into the metropolitan backbone networks by 2001, and then finally integrate with enterprise customers by throttling down or lowering bandwidth speed connecting to the enterprise, where we talk about 1 to 10-gigabits as the target from ethernet and fast ethernet networks."

One other way to define the telecom equipment sector is by customer, Leon states, "Broadly, it would be enterprise or service providers. We at ABN AMRO mostly focus on the service providers, so it will be suppliers selling product into those markets. And we really define customers into four key segments. The first is the incumbent market, which would be the traditional long distance companies: AT&T (NYSE:T) and MCI WorldCom and local exchange companies such as the regional Bell operating companies. Second would be new greenfield companies that have had a lot of success in the U.S. and Europe both in long distance and local. That would be Level-3 (NYSE:LLL), Williams Cos. (NYSE:WMB); and the CLECs: Intermedia (Nasdaq:ICIX), WinStar (Nasdaq:WCII), Teligent (Nasdaq:TGNT), Allegiance Telecom (Nasdaq:ALGX), and many, many others. The third category is Internet infrastructure, and the fourth, as Luke mentioned, is wireless infrastructure and handsets. And the customer matrix gives us a way of organizing opportunities and players in each of these spaces."

Armacost states, "Within the service provider segment, we do look at the IXCs, ILECs, CLECs, wireless, etc. Our scope, however, is a little broader. It is interesting, though, because each of these segments within the service provider markets has different requirements. The bottom line remains that an approach based on a customer perspective seems to be the best way to segment the market."

On stock valuations, Szymczak says, "We have companies that have just come public in the last six to nine months with market caps anywhere between 5 and 20 billion - with a "b," not an "m." And these are companies with relatively low revenue run rates, maybe 100 million a year. And so with valuations like that on essentially "start ups," it's hard not to put a higher valuation on Cisco, Lucent or Nortel."

Leon asserts, "The good news, especially for the large cap companies, is that these are still earnings-driven companies and we can still use price to earnings multiples, although they are extremely high even on 2001 earnings. But in markets that go through difficult periods, often we will see the market concentrate on the earnings-driven sector.

It might be a little more challenging in the emerging growth or small cap area because in some cases, the market caps far exceed their product revenue potential over a period of years. This is especially true for some of the recent companies that went public: Redback Networks (Nasdaq:RBAK), Juniper Networks (Nasdaq:JNPR) and Sycamore Networks (Nasdaq:SCMR). So we're seeing these companies try to be proactive by making acquisitions to broaden their platforms or their addressable markets. But it's one of the unique times in our stock market where we've had such successful stories flow into the public market, and now there is a rationalization going on to sustain leadership or broaden leadership when you've been so successful as a single- or two-product company."

The other trend on the consumer side is the home networking area, Szymczak asserts, "I think that it's in a very early stage right now and it's a difficult area to invest in right now because there really aren't pure plays. But increasingly, the trend seems to be that wireless LANs within the home will be the way to connect multiple devices. I think that's something we'll hear about over the next few years. Again, the carriers will be key to making that happen because the average consumer is not going to walk into CompUSA and put together their own wireless LAN, but rather, it will be a package that Bell Atlantic (NYSE:BEL) or a cable company will sell to you, and it could include a wireless LAN, a home gateway, etc. So with the number of households we have here in the United States, I think there is a big opportunity to get wireless LANs and networking products into a good percentage of those homes."

On partnering and alliances in the sector, Leon declares, "The environment we're in now is "coopetition," that's competition and cooperation, usually on a customer-by-customer basis. At the Western Cable Show, General Instrument (NYSE:GIC) had an announcement with Lucent, and it was specific to telephony over cable or IT networks. That announcement looked to be very clear for AT&T broadband Internet business. Yet we still see Motorola having very strong relationships with Cisco in a number of areas, including wireless. So the contradictions are going to become more frequent. Sometimes we will see partners or alliances for distribution channels somewhere else in the world. Newbridge (NYSE:NN) and Siemens had one for some time, and the expectation was always that Siemens would acquire Newbridge. That is not clear today, and Siemens was at some point 25% of Newbridge's revenues; today it's about 15%. Also, for investors focusing on emerging companies or small cap, even a press release will get the stock up 15% or 20%, but whether that leads to order flow and buyouts is another thing. But often we look at the situation much more optimistically if it's from the vantage point of a small company, and partnerships or alliances is just what they are. It's much different from when you're running the whole shop and driving products and driving markets on your own."

For a free brief interview excerpt in which Leon lists ratings (from hold to outperform) for several Communications Equipment firms, see http://archive.twst.com/notes/articles/jaf410.html

The panel goes on to offer recommendation about which sector stocks are most likely to reward investors.

This 130-page Investing in Communications Equipment Special Issue also includes:

2) The TWST confidential Off-The-Record survey of management performance at 19 Communications Equipment firms asked market insiders about the ability of management teams to create shareholder value by successfully managing their firm's financial side as well the ability of top management to execute operationally in this rapidly evolving sector.

Firms reviewed in Off-The-Record include:

3Com, ADC Telecommunications, ADTRAN, Advanced Fibre, Alcatel, Aware, Cabletron, Cisco, Ericsson, General Instrument, Lucent, RF Micro Devices, Motorola, Nokia, Nortel, Pairgain, QUALCOMM, Scientific-Atlanta and Tellabs.

3) 23 extensive (average 2,500 words) CEO Interviews with top management from the following sector firms discussing their future plans and outlook for their firm and the Communications Equipment sector:

Active Software, Adaptive Broadband, ADC Telecommunications, Advanced Fibre Communications, Applied Innovation, Applied Signal Technology, Belden, Brooktrout, CIDCO, Elcotel, EMS Technologies, Globecomm Systems, mPhase Technologies, Micronetics Wireless, Netrix, P-COM, Plantronics, SDL, Secure Computing, Spectrian, SSE Telecom, U.S. Wireless and ViaSat.

To obtain a copy of this insightful 130-page report, see http://www.twst.com/info28.htm or call (212) 952-7433. This special section is also included in the TECHNOLOGY Sector of TWST Online at http://www.twst.com/subscribe/techno.html

The Wall Street Transcript is a premier weekly investment publication interviewing market professionals for serious investors for over 35 years. Available at http://www.twst.com TWST Online provides free interview excerpts. For highlights, recent recommendations by analysts and money managers and business news, visit http://www.twst.com/newspage.html

Do a free search of the extensive TWST Online Archives at http://archive.twst.com/

The Wall Street Transcript does not endorse the views of any interviewee nor does it make stock recommendations.

Contact: The Wall Street Transcript,       http://www.twst.com
Mr. Peter McLaughlin       (212) 952-7433