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Analyst: Upgrades All Around!

Eight communications equipment vendors upgraded in one go? Sounds like an April Fool’s joke, right?

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
http://www.lightreading.com
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kephill 12/4/2012 | 10:41:18 PM
re: Analyst: Upgrades All Around! I am puzzled by the analyst's comments about the component sector lagging the rest of the sector recovery. Doesn't it usually work the other way. Is recovery in the component sector usually a good sign for the rest of the sector?
bigdaddy 12/4/2012 | 10:41:17 PM
re: Analyst: Upgrades All Around! You have attempted to apply logic where it does not belong.

Now unless there is a case to be made for built up inventory of components with the system houses, in which case this would be unique to this point in time.

Bigdaddy
mrcasual 12/4/2012 | 10:41:17 PM
re: Analyst: Upgrades All Around! I am puzzled by the analyst's comments about the component sector
lagging the rest of the sector recovery. Doesn't it usually work the other
way. Is recovery in the component sector usually a good sign for the rest
of the sector?


I was puzzled by this one as well. Most of the compenent guys suffered last year due to high inventory due to cancelled orders.

Unless the systems guys had a big private stash of components, which I doubt, then the components will have to lead the systems guys. The only other scenario is if the systems guys are selling previously written off inventory, in which case no new components are required.
WolfLarsen 12/4/2012 | 10:41:17 PM
re: Analyst: Upgrades All Around! Think Inventory
DoTheMath 12/4/2012 | 10:41:13 PM
re: Analyst: Upgrades All Around! I don't understand where the money is coming from for the carriers. The ILECs have positve (but declining) cash flow, so that is understandable, but almost all non-ILEC players suffer from negative cash flows. Unless capital markets fund them, I don't understand how they can spend. The bond holders (not to mention stock holders) have already taken such a big bath, so why would they give the carriers more money?

Does anyone have any insight as to how spending is expected to go up in this environment? This is a life and death question for a lot of us, so I hope the analysts have some real basis.
gordon_gekko 12/4/2012 | 10:41:03 PM
re: Analyst: Upgrades All Around! This sector is in real trouble and stocks are way overvalued!I suspect this is a classic pump and dump!A lot of companies that Crespi cited in his repoet will go bankrupt in less than a year,just wait Greenspan raising interest rates!What a joke!
optigirl 12/4/2012 | 10:41:02 PM
re: Analyst: Upgrades All Around! Yes. If you read some of his reports you will see that he keeps referring to RHK....

Either he's on the take or he's out to lunch......
gordon_gekko 12/4/2012 | 10:40:59 PM
re: Analyst: Upgrades All Around! bottoming out!I can't believe Crespi has upgraded Amcc!Amcc business sucks and price x sales is 23!
gordon_gekko 12/4/2012 | 10:40:59 PM
re: Analyst: Upgrades All Around! My conclusion ,after reading past Crespi reports on stocks,is that Crespi is a fool,buy i cannot exclude that he use the upgrades to dump stocks!
dave77777 12/4/2012 | 10:40:56 PM
re: Analyst: Upgrades All Around! Has to come from revenues. When revenues for carriers pick up, so will their spending. Obviously not happening yet, so I don't what BoA is thinking, unless they assume carriers will overbuild again even while still losing money on the last overbuild.

Don't hold your breath, could be a couple years.
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