Analyst: Upgrades All Around!
It's no laughing matter for Christopher J. Crespi, a managing director at Banc of America Securities LLC, who has done just that. This morning Crespi upgraded Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI), Ciena Corp. (Nasdaq: CIEN), Cisco Systems Inc. (Nasdaq: CSCO), Juniper Networks Inc. (Nasdaq: JNPR), Lucent Technologies Inc. (NYSE: LU), ONI Systems Inc. (Nasdaq: ONIS), Nortel Networks Corp. (NYSE/Toronto: NT), and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA).
Crespi justifies his round of upgrades with the contention that the current quarter marks a cyclical turning point in the communications industry and that the worst seems to be over.
"We believe this quarter marks a cyclical inflection,” Crespi writes in the research note. "Although we expect only marginal improvement over the next few quarters, we do think the worst has passed.”
Four of the companies upgaded -- Ciena, Juniper, Lucent, and ONI -- have recently pre-announced worse-than-expected results for the current quarter (see Lucent Weighs on the World, ONI's Facing a Drought and Juniper: Guidance Down, Stock Up).
Five of the eight upgraded companies saw their stock rise in midday trading today. ONI's stock, which experienced the biggest hike, rose $0.38 (6.16 %) to $6.55. (ONI also announced today that the bulk of Nortel's patent lawsuits against it had been dropped -- see Nortel Drops Patent Disputes With ONI)
A major reason for upgrading the stock is what Crespi calls a "return to normal" seasonality. “A return to normal pattern is an important part of a recovery,” he writes, pointing out that, although January was an extremely weak month, both U.S. communication equipment orders and shipments were at the highest level since the end of the 1990s. It was the first month in years with numbers for both these areas near historic trends. According to the note, sequential improvements should continue throughout the rest of 2002.
Expected increases in capital expenditure also give rise to optimism. In line with a note published by Sanford C. Bernstein & Co. Inc. analyst Paul Sagawa last week, predicting that investment in communications equipment will start picking up in the second half of this year (see Sagawa Calls for Rebound (Again)), Crespi writes that capex will start showing sequential improvement this summer. “Furthermore,” he writes, “our recent conversations with all the major carriers indicate they are resuming normal planning and deployment schedules.”
Other analysts are a bit more cautious about announcing an imminent rebound. Steve Kamman, an analyst with CIBC World Markets, for instance, agrees that the market is bottoming out, but says that there is no reason to believe that we’ll see a major rebound anytime soon.
“The reality of the sector is that we’re probably past the really gut-wrenching revenue declines,” he says. “But even if we stabilize at the current level, there are companies that will go bankrupt.”
While the Crespi note is one of the most optimistic forecasts seen in a while, the analyst warns that not all equipment segments will recover, and that the component sector will probably lag behind the system vendors by at least one or two quarters. Banc of America Securities did not upgrade any component stock today. The note also warns that European and Asian capex recovery will proceed more slowly than in the U.S.
— Eugénie Larson, Reporter, Light Reading