Lehman: Telecom Downturn Is Over
"Today we are upgrading our rating on the Wireline Equipment industry to a 1 Positive from a 2 Neutral to reflect our increasing confidence that the fundamentals of the industry appear to have stabilized and are poised to improve in the not-too-distant future," Levy wrote.
Levy says carriers worldwide are likely to collectively spend up to 5 percent more on wireline equipment in 2004. His confidence is based on several factors, including reports from his colleagues at Lehman that say wireless carriers will spend "slightly" more next year. That's big news for the telecom industry, Levy says: "It's the first growth we've seen in three years." Given that many of the companies Levy covers get much of their revenue from wireless carrier spending, that's also very good news.
Lucent Technologies Inc. (NYSE: LU), for instance, gets 42 percent of its revenues from the sale of wireless gear, or equipment needed for wireless carrer infrastructure, according to Lehman. Nortel Networks Corp. (NYSE/Toronto: NT) gets about 40 percent.
Sales to wireless carriers will also buoy revenues of Tekelec Inc. (Nasdaq: TKLC), which supplies nearly 85 percent of its test and measurement gear to wireless carriers; equipment reseller/asset manager Somera Communications (Nasdaq: SMRA), which does over half its sales to wireless providers; and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), which does about 40 percent of its U.S. business selling infrastructure gear to wireless carriers, according to Lehman.
Levy's also looking forward to MCI (Nasdaq: WCOEQ, MCWEQ) spending nearly $1 billion in 2004. MCI has indicated it would spend this much on emerging from Chapter 11, Levy says. Also, the carrier's got multiple networks that need to be "rationalized."
But telecom renewal isn't just about how much carriers will spend on vendors' gear. There also are signs that vendors' cost-cutting efforts are paying off in improved margins, Levy says. While that's not as good as having sales go up, "it is encouraging nonetheless," he writes.
While the industry moves forward, some vendors will do better than others. In an interesting twist, Lehman gives Nortel slightly better short-term prospects than rival Lucent.
The firm has upgraded Nortel's rating and moved its forecasts up, projecting 2004 earnings per share (EPS) of $0.08 instead of its previously estimated $0.07. The firm's new 2005 EPS for Nortel is $0.15. For Lucent, the firm anticipates breakeven EPS at the end of December 2003. The firm thinks Lucent will see a 2004 EPS of $0.04 and a 2005 EPS of $0.08.
— Mary Jander, Senior Editor, Light Reading