Contract Manufacturers and Chip Stocks Feel Nortel's Pain

Coming shortly after optical networker Ciena's (CIEN Quote) pedal-to-the metal earnings report, Nortel's (NT Quote) unexpected earnings warning came like a downed bridge in the middle of the road.

Canadian networking giant Nortel cut revenue and earnings for the rest of the year, saying it was seeing a slowdown in business that would last until the end of 2001. Nortel's sheer size and its one-time darling status mean its bad news is having a major impact throughout the market. And when corporate bad news arrives, analysts follow. Nortel and other telecommunications companies this morning were hit with a fistful of downgrades and cuts in earnings estimates.

Nortel was down $9.75 to $20, losing just about one third of its market value. Lucent, battered recently on its own continuing bad news, was trading down 80 cents, or 5.9% to $12.82. Even Ciena, which had climbed 28.6% after its bullish outlook earlier this week, was trading down $5.13, or 5.8%, to $83.88 in recent trading.

But what are investors to take away from the conflicting news out of Nortel and Ciena? Some analysts reconciled the difference in reports by suggesting a product shift from the older networking products offered by firms such as Nortel and Lucent to the next-generation fiber optic systems from Ciena and others.

Networking giant Cisco was recently 8.7% lower to $28.13. It hit a 52-week low earlier in the day.

Nortel's news isn't just spooking investors concerned about the tech slowdown. Its business has a direct link to many other big names. Cable and component maker Corning (GLW Quote), for example, changed its top-line estimates this morning on its photonics business. The unit sells more than 15% of its products to Nortel. Corning revised down growth estimates for the year from 75% to 50%. After gaining 8% yesterday, Corning was down $9.02, or 21.5%, to $32.99.

Leading optical component supplier JDS Uniphase (JDSU Quote) counts on Nortel for at least 15% of its sales. JDSU was down $8.31, or 18.4%, to $36.81. And components supplier Oplink Communications (OPLK Quote) also was falling, down $1.84, or 13.9%, to $11.38 in recent trading.

So it's little surprise that some of the semiconductor makers whose chips are used in communication networks were also feeling Nortel's pain.

Advanced Micro Circuits (AMCC Quote), which relies on Nortel for more than 15% of sales, was down $7.31, or 14.2%, to $44.38. Other communication chips with sales to Nortel were suffering, including Vitesse Semiconductor (VTSS Quote) and PMC-Sierra (PMCS Quote).

Electronic manufacturing companies, which assemble parts into products for companies on a contract basis, also were dragging. Hardest hit: C-Mac Industries (EMS Quote), a Canadian contract manufacturer that saw more than half its revenue in the fourth quarter come from Nortel. It was down $14.43, 31.9%, to $30.85.

Other contract manufacturers with significant exposure to Nortel include industry leader Solectron (SLR Quote) , which is trading down $2.63, or 7.7%, to 31.57; SCI Systems (SCI Quote) , down $2.31, or 8.5%, to $24.80 and Sanmina (SANM Quote), off $6, or 14.7%, to $34.94.