Sagawa Calls a Bottom

A little more than a year ago, Paul Sagawa, an analyst with Sanford C. Bernstein & Co. Inc., made a bold call in the telecommunications industry, saying the major carriers were about to enter a period of deep capital spending cuts (see Report Downgrades Cisco and Nortel ).

Most other Wall Street analysts poo-pooed Sagawa's report, but he proved to be right on the mark. Now Sagawa appears to be calling the bottom.

“I feel good about the whole telecom sector,” said Sagawa in an interview. “It won’t be like it was in 1999, but it will be a lot better than 2001.”

As for the rest of 2002, he says that sequential growth will return in Q2 with year-over-year growth by the end of 2002.

In a research note published this morning, Sagawa told investors that he sees the telecom sector rebounding in 2002 as carriers start spending on equipment again. But he cautions that equipment companies will still have a tough first quarter, with sales picking up towards the end of the quarter. Companies will also likely provide more visibility into Q2, which is also good news, he says.

“Usually, the way to make money is to buy stocks when everyone else is most negative,” says Sagawa. “And sell when people say there is no way they can go down.”

Why is he so bullish? His reasoning is simple: “Capex can’t decline forever,” he says. “At some point they will have to start spending again.”

Capital spending declined a total of 44 percent in 2001 over spending in 2000. Each quarter it declined in the double digits, with the worst drop occurring between the third and fourth quarters when capital expenditures declined 18 percent, according to Sagawa’s report. But new spending is on the way, mostly from incumbent carriers that are supposedly improving their cash positions.

“I don’t see any reason why capex will be cut more in 2002,” he says. “And there is some possibility that with better economic conditions there could be some upside.”

While other analysts agree that the bottom of the capex decline is nearing, some predictions are a little less optimistic.

“We are probably near the bottom,” writes Steve Kamman, an analyst with CIBC World Markets in a note published yesterday. But he cautions that telecom equipment companies may not be out of the woods yet. “The telecom equipment sector is still facing potential capex cuts in 2002, but again the worst of sequential declines are likely behind us.”

Kamman believes that carriers will likely cut another 10 percent to 15 percent in their budgets for 2002. And if cash flow improves, as many carrier analysts predict, he believes this will go toward paying off debt rather than buying new equipment.

As for investments, Sagawa points out that he still sees current valuations as key determiners of performance over the next few months. While all communications stocks will likely benefit from increased spending, he says those with low valuations will see the biggest upsides. As a result, he sees Nokia Corp. (NYSE: NOK), Lucent Technologies Inc. (NYSE: LU), 3Com Corp. (Nasdaq: COMS), Palm Inc. (Nasdaq: PALM), and Nortel Networks Corp. (NYSE/Toronto: NT) (in that order) having the greatest potential in 2002. He is less thrilled about Cisco Systems Inc. (Nasdaq: CSCO), because he says the company already trades 50 percent above fair value.

Kamman also sees Lucent as a good buy in 2002.

At midday, Nokia was down 0.58 (2.16%) to 26.32; Nortel was down 0.03 (0.36%) to 8.25; and Cisco was off 0.041 (0.02%) to 20.72. Lucent was up 0.11 (1.59%) to 7.04.

— Marguerite Reardon, Senior Editor, Light Reading
flanker 12/4/2012 | 11:06:37 PM
re: Sagawa Calls a Bottom It's a little early to jump off the cliff just yet.
vayeheeor 12/4/2012 | 11:06:35 PM
re: Sagawa Calls a Bottom While Sagawa see's Cisco at "50 percent above fair value" they deserve to be. In contrast to the likes of NT and LU, CSCO has not written-off nearly the level of goodwill nor have they had to cut as deeply into their ranks. They have ridden the crash better than the rest and will emerge well ahead of the pack. As a component vendor, I have watched CSCO position itself to yank market share away from the less well managed (in turmoil) competitors. It is likely that '02 will be CSCO's opportunity to breakaway.
MaxQoS 12/4/2012 | 11:06:32 PM
re: Sagawa Calls a Bottom On what planet is LU likely to be a performer in 2002? From what I can see, the company is in a total shambles. As pointed out earlier, this is more vintage Sagawa: LU is great and CSCO sucks.
The only news here is that he apparently isn't knocking NT.

CSCO may be overvalued based on the fundamentals but everyone I know agrees that it is the only one of these three companies that is well positioned to grow and gain share. Nobody can say for sure what will happen so I've got my stop loss order in but I'll stay long on CSCO.
kbkirchn 12/4/2012 | 11:06:32 PM
re: Sagawa Calls a Bottom Sagawa is overrated. He was calling for a crash in tech for 2yrs before it happened. And he has always stated CSCO is overvalued and promoted LU.

Some people say his brief career as a LU Account Rep has made him overly optimistic about the company's future.
HarveyMudd 12/4/2012 | 11:06:31 PM
re: Sagawa Calls a Bottom The fact is that up until year 2005, the ca[ital expenses at the major carriers would continue to decline. Their network is healthy and functional so any sales attempt by the equipment vendors will not be successful.

The carriers major buying cycle used to be 6-7 yearsa but now some of the slick vendors want the carriers buy their products every year. Vendors always speak of next generation products but the facts arte to the contrary. Internet growth haqs considerably slowed down.

The telecom market will not regain its 1999 value level even in the nest 10 years or so. Billions of dollars have ben lost by millions of people.

Cisco' stock even at its current prices are over valued. The internet bubble has burst so Cisco has no place to go.

VCs and other marketeers simply can not create artificial demand and market hype to sell products.
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