Scott Moritz

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Wireless Surge Brightens Verizon View

Scott Moritz

On balance, Verizon (VZ Quote - Cramer on VZ - Stock Picks) sounded surprisingly chirpy to its network-equipment suppliers Tuesday.

Sure, the giant New York telco dampened some spirits by trimming its second-half network-spending plan. But analysts were inclined to look on the bright side, pointing to the company's surprisingly robust forecast for wireless subscriber growth and the solid double-digit percentage rise in its capital budget even after Tuesday's belt-tightening. Verizon slipped 5%, dropping $1.65 to $33.06.

So if the outlook remains cloudy for the nation's largest telco, it's starting to clear a bit for the gearmakers who count themselves among its leading suppliers. Verizon said Tuesday that erosion in its local phone business will force it to trim about $500 million from 2003 core network improvement plans.

Meanwhile, though, the wireless business continued its winning streak. And with less than four months remaining in the year, the company is still on track to spend 19% more on conventional gear and 15% more on wireless equipment in the second half than it did in the first half of 2003.

Analysts quickly listed their winners and losers. Clearly, the main victims of Verizon's cuts were old-line phone switch suppliers such as Lucent (LU Quote - Cramer on LU - Stock Picks) and Tellabs (TLAB Quote - Cramer on TLAB - Stock Picks).

But Verizon left its wireless budget untouched, which is good news for Nortel (NT Quote - Cramer on NT - Stock Picks) and Lucent's mobility business. According to Lehman Brothers, three-quarters of its sales to Verizon are wireless gear. As TheStreet.com reported earlier this month, Lucent is in line for a large wireless contract renewal with Verizon.

"You really don't like to see capex cuts when you are expecting a big rebound," says RBC Capital Markets analyst John Wilson. But even if Verizon comes in below the new range, the equipment makers "are likely to have a robust fourth quarter," says Wilson. He has a sell rating on most of the equipment companies except for Nortel, on which he has a neutral rating, and Alcatel (ALA Quote - Cramer on ALA - Stock Picks), which he rates buy.

Home Alone

The wireless excitement aside, analysts and investors say one takeaway from the Verizon conference call is not to get excited about the so-called fiber-to-the-home plans bandied about by the Bells earlier this year.

When asked for a progress report on their presumably budding fiber strategy, Verizon CEO Ivan Seidenberg offered no time or dollar commitment. Instead, he said the plans are continuing. "Our will to move ahead shouldn't be questioned," said Seidenberg.

But of course, observers are questioning just that.

Earlier this year, in a blatant attempt to demonstrate to regulators that the Bells had competitive fire, Verizon, SBC (SBC Quote - Cramer on SBC - Stock Picks) and BellSouth (BLS Quote - Cramer on BLS - Stock Picks) asked fiber-optic suppliers to bid for last-mile upgrade contracts. The bids are due this month, and Seidenberg says he was interested to see what the suppliers present.

"This is the most important decision they will make for the next 100 years," says Wilson. "Sure they want to hear from the suppliers. They'll probably pick out a few things they like and put it out for bid again."

But the fiber strategy was primarily intended to sway regulators toward a favorable ruling on industry prices. As it turned out, the regulators weren't swayed -- so fiber to the home will likely live on as a topic, but without any immediate buying decisions.

Investors had bid up fiber-optic shops like JDS Uniphase (JDSU Quote - Cramer on JDSU - Stock Picks) and Corning (GLW Quote - Cramer on GLW - Stock Picks) in anticipation of good news from the Bells. Corning was down 13 cents to $9.57 in midday trading, and JDS was up 5 cents, or 1%, to $4.05.