Who's Winning in the Rebound?

As the telecom industry finds its footing, Light Reading Insider assesses the survivors

March 23, 2004

11 Min Read
Who's Winning in the Rebound?

The telecom market is back, but there's more work to do.

Recent research, both within these pages and from outside sources, indicates that stabilized levels of capital spending by the big telecom carriers has helped put a floor to the market for telecom equipment (see Packets Key to Capex Comeback, Carrier Capex Set for 2004 Rebound, and Capex Is Back).

But that doesn't mean everybody is happy. According to a new Light Reading Insider, "Telecom Recovery Leaders and Laggards," the market leaders are now sitting in the catbird seat, positioned to consolidate their leads, while laggards continue to struggle to find a way to gain market share in a less robust market.

That means the coast isn't clear -- and more consolidation is on the way for all of the telecom suppliers involved. A new round of price competition and cutthroat competition is likely to narrow the field to only the strongest players.

This month’s Insider, Light Reading's monthly paid research newsletter, presents a 31-page qualitative and quantitative analysis of 27 prominent telecom equipment and components suppliers and ranks the most likely leaders in the recovery to come. The report updates the Insider issued in September 2002, "Leading Recovery Candidates," which reported that the market was stabilizing and looked for leaders such as Cisco Systems Inc. (Nasdaq: CSCO) and QLogic Corp. (Nasdaq: QLGC) to strengthen their positions in the rebound (see Cisco, QLogic Top Optical Oracle Charts and Optical Oracle's Bottom Feeders).

After applying a full suite of market and financial analysis techniques, the Insider scored the 27 North American telecom equipment and component suppliers based on market positioning, branding, and a number of financial metrics. The Insider’s financial rating system put a heavy weight on the rate of improvment in financial results in 2003, hypothesizing that those that rebounded most rapidly were also gaining market share in the recovery.

The winner? Cisco Systems, trailed closely by Juniper Networks Inc. (Nasdaq: JNPR). These two routing leaders rose to the top of the charts largely because their financials improved quickly -- and because the rebound in telecom equipment gear has so far favored suppliers of packet-based routing and switching gear, rather than legacy technologies.The third-place finisher was Nortel Networks Corp. (NYSE/Toronto: NT), which also received the “most improved” award for it's quick return to profitability in 2003. However, these results were tabulated before more accounting uncertainties were recently announced by Nortel’s management (see Nortel CFO Out ).

The top five finishers in the Insider analysis are outlined in the chart below.

Table 2: The Top Five

Company

Financial Rank

Light Reading Panel

Final Score*

Cisco

1

1

3

Juniper

6

2

10

Nortel

2

4

10

QLogic

7

3

13

Xilinx

3

6

15



The last-place finisher was Corvis Corp. (Nasdaq: CORV), followed closely by Ciena Corp. (Nasdaq: CIEN) and Lucent Technologies Inc. (NYSE: LU).

The Insider also took a look at some of the larger international players. Although the varied methods of financial reporting in international markets prevented a full ranking of global players, Light Reading did rank some of the largest incumbents, rating ADVA AG Optical Networking (Frankfurt: ADAG.F), Alcatel SA (NYSE: ALA; Paris: CGEP:PA), and Siemens Information and Communications Networks Inc. as the best.

Whether companies got ranked at the top or the bottom of the Insider chart, the 2003 rebound in the stock market gave most companies a big boost, with some companies gaining over 500 percent in the last 12 months. The table below shows share-price results over the last 12 months.

Table 1: Share Price Rebound Leaders

Company

Market Cap ($M)

Price-to-Sales Ratio (for 12 Months)

Price-to-Book Ratio

Share Price (02/13/04)

12-Month High

12-Month Low

12-Month Share Price Change (%)

Avanex

694

12.46

3.86

5.45

7.57

0.71

590

Avici

210

5.74

2.02

17.42

20.29

3.45

370

PMC-Sierra

3,680

15.11

4.87

21.8

24.91

5.16

345

Vitesse

1,790

10.82

6.34

8.59

8.98

1.94

327

Nortel

34,090

3.47

15.93

8.16

8.43

1.82

256

Corvis

1,003

6.3

4.31

2.36

3.07

0.47

252

Harmonic

883

4.72

4.35

12.32

12.7

2.75

223

Juniper

10,360

14.76

1.84

26.6

31.25

7.45

211

Agilent

17,600

2.9

5.3

36.92

38.08

12.11

197

Broadcom

11,730

7.47

7.88

39.69

45

11.86

195

Agere

6,530

3.44

13.25

3.5

4.14

1.29

171

Foundry

2,950

7.33

6.3

22.44

33.75

7.32

167

Lucent

18,530

2.16

9.02

4.39

5

1.35

160

Corning

16,730

5.5

2.99

12.65

13.89

4.54

156

AMCC

2,230

22.07

2.02

7.32

9.2

3.2

120

Xilinx

14,190

11.26

2.37

42.46

45.4

20.86

114

Net.com

320

2.48

2.72

13.01

14.49

5.54

112

Extreme

980

2.82

4.99

8.27

10.6

3.58

106

Altera

8,420

10.4

7.64

22.72

26.82

11.5

91

Cisco

165,750

8.38

5.99

24.05

29.39

12.33

81

JDSU

6,970

11.24

6.62

4.94

5.88

2.6

81

Brocade

1,720

3.2

1.49

6.76

8.28

3.7

77

Sycamore

1,320

36

1.84

4.87

6.52

2.89

57

Tellabs

4,080

4.28

4.62

10.11

11.37

5.07

48

AFC

2,070

6.19

2.14

23.74

27.5

13.9

39

QLogic

4,190

8.2

1.36

44.67

58.72

33.07

34

Ciena

2,830

2.16

2.23

6.08

8.14

4.19

13



Was the stock market’s powerful rally in 2003 rational and fair? Markets usually aren't fair -- or rational. The Insider shows that it was mostly low-priced, volatile stocks that had the biggest gains. For example, Avanex Corp. (Nasdaq: AVNX) has experienced the largest share-price gain in the last 12 months, with a gain of 576 percent, according to Light Reading’s research. However, Avanex also finished 24th in the Insider’s market ranking system, indicating that its gains may have been a bit too exuberant.

A full analysis of the market and a ranking of the 27 companies is available in the report, which can be purchased here.

— R. Scott Raynovich, US Editor, Light Reading

Want a special deal on an Insider subscription?On April 13, analysts from both the Light Reading Insider financial research service, and Light Reading's Heavy Reading market research division will examine technology investment questions like those addressed above at a unique event hosted at the W Hotel New York Union Square in Manhattan.

The conference – The Telecom Recovery: Opportunity Amid the Chaos – will examine the investment potential of a wide variety of technologies including triple play, 802.11 WiFi, FTTP, hosted SIP applications, SSL VPNs, IP video, MPLS-based convergence, and carrier-class Ethernet. It also will feature keynote speeches by Hossein Eslambolchi, President of AT&T Global Network Services, Pradeep Sindhu, CTO of Juniper Networks Inc., and Steven D. Levy, Managing Director of Lehman Brothers.

If you register for the conference now, you will receive a complimentary subscription to Light Reading Insider, a $1,250 value. That means you get both an Insider subscription and admission to the conference for $850.

Register here.

An annual single-user subscription to the Insider, which includes access to the complete archives, the current report, and each of the monthly reports issued over the next 12 months, is available for a limited time only for $1,250 per year. It's available here.

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