Optical/IP Networks

Optical Pessimism Runs Rampant

Thanks to a bevy of recent earnings disappointments, optical and telecom investing is becoming as depressing as homecoming at an orphanage.

Shares of big equipment vendors and the components makers that supply them were off in early trading Tuesday as the Nasdaq crept down to its lowest level since early January. The Light Reading Index was off 25.12 (4.6%) to 520.87.

For the most part, all of last week’s bad news has been absorbed, but a few late stock downgrades by analysts have come rolling in. JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU) was down 2.94 (8.2%) to 32.88 in midday trading after U.S. Bancorp Piper Jaffray downgraded the stock from Strong Buy to Neutral (see JDSU: Less from More). One of JDSU’s most significant customers is Nortel Networks Corp. (NYSE/Toronto: NT), which significantly cut its revenue guidance last Thursday for the first fiscal quarter of 2001.

Another big components house, Corning Inc. (NYSE: GLW), saw its shares drop 2.11 (63.9%) to 30.89 around midday. On Friday Corning reiterated its own earnings guidance, but said its year-over-year revenue growth would only be about 50 percent for its photonics business, down from an earlier guidance that growth would be between 75 percent and 90 percent (see Corning Reaffirms Guidance).

Corning was downgraded by Salomon Smith Barney, Merrill Lynch & Co. Inc. (NYSE: MER), ABN AMRO, and others on Jan. 25, after its most recent earnings announcement. During the week of that announcement, Corning shares traded as high as $70. In the past month, Corning shares have lost more than 52 percent of their value.

Systems vendors, of course, are eating it, too. Cisco Systems Inc. (Nasdaq: CSCO) dragged the Nasdaq down at midday as it slipped 1.69 (5.97%) to 26.56. In an interview with a Swedish newspaper over the weekend, CEO John Chambers reportedly said that much of the U.S. economy was in a recession that is threatening to spread around the globe.

Interestingly, if that happens, Cisco will need to again go back and revise its estimates for the next two quarters. Its current projection that its next quarter's revenues will be between $6.4 billion and $6.72 billion is contingent on a short economic downturn that doesn’t spread abroad (see Cisco Misscos!).

Investors are also increasingly concerned about Lucent Technologies Inc. (NYSE: LU) as it is working this week to close a credit financing deal that would give it some badly needed funding. The Financial Times reported Monday that if Lucent fails to arrange the financing, it may have to call on its backup lending facilities, which could cause credit rating agencies to downgrade its debt even further, making it even more difficult to raise money going forward. At noon, Lucent shares were off 0.10 (0.79%) to 12.57, as the once mighty stock comes ever closer to being a single-digit midget.

Nortel, too, saw its shares slightly lower this morning, dropping 1.02 (5.1%) to 18.98. Adams Harkness & Hill downgraded the stock today, following downgrades by 10 different investment analysts on Feb. 16, the day after Nortel booted all over its previous market optimism by declaring that spending postponements from U.S. carriers would last well into the fourth quarter (see Nortel's Nasty Surprise).

Nortel has lost 40 percent of its value in the past five trading days. Its shares are down 66 percent from their price of one year ago.

-- Phil Harvey, senior editor, Light Reading http://www.lightreading.com

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