Lehman Says Capex Trend Has Turned

Lehman Brothers says things in telecom land are getting better and will continue to get better.

The bank's telecom equipment analyst, Steve Levy, raised his capital spending forecast, saying capex will increase 6 percent in 2004. Levy previously predicted a 5 percent capex jump and says the improving capital expenditure picture will help boost the revenues and profit margins of the equipment vendors.

”On the margin, things are getting better, and we’ve reached an important inflection point,” Levy said today on a conference call with investors.

Lehman sees the turn in capital spending (the "inflection point") as a long-term trend, rather than a short blip. Levy says Wall Street has not entirely tuned into the potential for improvement in the industry. A Lehman Brothers survey of investment banks showed that only two of 14 banks, including Lehman Brothers, had a positive outlook on the sector.

The improvement will come, says Levy, because most equipment vendors have cut their cost structures so steeply that even moderate growth in revenue will result in significant improvement in profit margins.

”Revenues have just started to climb, and we have seen gross margins snapping back smartly."

Another issue ignored by many, according to Lehman Brothers, is that capital spending improvements are typically not reflected in the revenue of equipment providers until an average of 45 days after they are announced. The chart below shows how capital spending increases have preceded equipment revenues.

Following this logic, capital spending increases made in the last two months have yet to be recognized as revenue by the equipment providers. In addition, first calendar quarters are usually weak, meaning there could be more upside ahead in the second quarter.

What’s this mean for the stocks of major equipment providers? Lehman sees those companies focused on major capital spending initiatives such as broadband access, wireless equipment, and edge routing, as the larger beneficiaries of the capital spending bump.

Levy's “favorite" investment targets include Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI), Tekelec Inc. (Nasdaq: TKLC), and Lucent Technologies Inc. (NYSE: LU).

— R. Scott Raynovich, US Editor, Light Reading

Investment VIPs, including fund managers, technology executives, and analysts – among them, Steve Levy of Lehman Brothers – will be participating in the Light Reading Live symposium on Tuesday, April 13, 2004, at the Four Seasons Hotel in New York City – The Telecom Recovery: Opportunity Amid the Chaos. Check it out here.

Inaxs 12/5/2012 | 2:19:39 AM
re: Lehman Says Capex Trend Has Turned Must admit that Steve Levy, whom I had a good amount of respect for, has lost me with his latest analysis. First off, the chart doesn't make any sense - there seems to be little correlation between carrier CapEx spending changes and resultant vendor revenues, opposite of what the article claims.

Secondly, Levy's so-called "hot" picks include Tekelec and Lucent. Agree with the AFCI pick but where is Nortel?

The latest excitement related to Lucent seems related to potential DoD expenditures to shovel money Lucent's way for a secure network for the military. Why this same money isn't being shoveled to General Dynamics who bought the most closely related Lucent division a few years back is beyond me (but then again, maybe the DoD is shoveling money to both).

Increases in service provider CapEx should be benefiting Nortel more than Lucent unless Levy knows something most of us don't know.

corvisoricle 12/5/2012 | 2:19:26 AM
re: Lehman Says Capex Trend Has Turned I think you missed the point which is telecom is back for real. This is not a bubble. New technology is driving this. There is many technologies which will make broad band to the end used a commodity very soon. The triple play has large dollars attached to it. At the current pricing I have a hard time seeing any losers in this sector though I have my favorite :)
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