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Analyst Actions: Nortel Networks, Corning, Dell, H-P

Analyst actions

Nortel Networks (NT) sang a sad song about future earnings last night and now it's facing the music from some of Wall Street's biggest brokerages. Most analysts have made downgrades and revisions while attempting to figure out how big the repercussions will be.

Merrill Lynch analyst Tom Astle cut the company's intermediate-term rating to accumulate from buy, while dropping the 2001 earnings per share forecast to 74 cents from 95 cents. 2001 revenue is now expected to be lower as well, forecast at $33 billion from $39 billion. The company was also dropped from Merrill's Techfolio and replaced by Extreme Networks (EXTR).

Meanwhile, Lehman Brothers cut its price target to $26 from $50 and its 2001 earnings per share estimate to 72 cents from 97 cents. Credit Suisse First Boston dropped the company to buy from strong buy and cut its price target to $40 from $80. Additionally, it snipped its 2001 earnings per share forecast to 65 cents from 95 cents and its 2002 forecast to 85 cents from $1.15. Goldman Sachs lowered its 2001 earnings per share forecast to 70 cents from 98 cents.

"We thought Q1 would be ugly but this is worse than we thought," Merrill's Astle wrote. "This sector has turned ugly fast. We had sensed sectoral weakness in [the first quarter] but we did not expect Nortel to see this much weakness and lack of visibility. Within a three-week period the company has dropped its [first quarter] revenue target by 22%."

But Astle didn't stop there. The Nortel warning has enormous repercussions across the board, with customers, rivals and suppliers. The Merrill analyst said that the Nortel news reaffirms their already cautious view of the networking equipment sector, especially in the wake of the Cisco (CSCO) warning from last week and the utter lack of visibility in most sectors.

"Clearly, or maybe not so clearly, no one's crystal ball is working these days," Astle wrote, surveying the Nortel fallout.

He said that JDS Uniphase (JDSU) might experience some short-term stock weakness, but that its ties to Ciena (CIEN), which unlike Nortel, announced that business would improve in 2001, could offset the losses due to its sales to Nortel. Exfo (EXFO) and Avanex (AVNX) are both in a similar situation, with Nortel representing a 10% chunk of business that may or may not be offset somewhere else. It's worth noting that Exfo has yet to warn, while Avanex was cautious in its comments.

But if you're looking for one company that could get killed by the news, then look no further than Corning (GLW - Get Report). Fellow Merrill analyst Steven Fox lowered his estimates on Corning, cutting both 2001 earnings and growth forecasts, since Corning's photonics business derives 15% of its revenue stream from Nortel.

"We think it will be difficult for [Corning] to grow its photonics business at prior expectations of 75-90% in 2001," Fox wrote. "We now look for 45% growth to around $1.4 billion. Our previous estimate was $1.7 billion. The company's new guidance, released this [morning], is for 50% photonics sales growth."

Dell (DELL) and Hewlett-Packard (HWP) were both taken to task by analysts in the wake of last night's earnings release.

Despite the negativity in the PC sector, Merrill Lynch analyst Steven Fortuna was happy with Dell's quarter and reduced his estimates as visibility remains fogged in. He cut his fiscal 2002 (calendar 2001) sales forecast to $37.1 billion from $37.5 billion and reduced his 2002 earnings per share figure for a second time, lowering it to 82 cents from 85 cents.

"We were very impressed with Dell's quarter as the company turned in strong growth in units (up 43%) and revenue (up 28%) in a no-demand environment," Fortuna wrote. "We believe that this strong performance showcases the continuing strength of Dell's direct model as the company has been able to use price as a weapon to profitably drive market share gains.

Credit Suisse First Boston analyst Kevin McCarthy also wrote a love letter to the stock, saying Dell was the "best horse on a sloppy track." McCarthy did not adjust his estimates or rankings on the stock, choosing to comment on the positive results of the fourth quarter. "Dell gained market share in every product category and in every region," he wrote. "We continue to believe Dell is the safest stock to own in the computer hardware group."

Lehman Brothers reduced its 2002 earnings per share estimate on Dell to 78 cents from 84 cents, while dropping its forecasted growth rate to 8% from 13%. The current Wall Street consensus calls for Dell to earn 90 cents a share. "Unfortunately," the company's memo began, "We believe consensus is likely to be... higher on both. Also margins are expected to stay flat for the next one to two quarters."

Prudential Securities analyst Kimberly Alexy cut her 2002 earnings per share estimate to 82 cents from 87 cents. "We continue to like the stock long-term but expect limited catalysts until growth visibility improves."

Meanwhile, Hewlett-Packard's earnings release was either a complete failure or a total anomaly. Lehman Brothers was fairly positive on H-P, while Credit Suisse First Boston clearly was not.

Lehman dropped its 2001 earnings per share estimate to $1.60 from $1.70 and put its 2002 earnings per share estimate at $1.90, 8 cents lower than the current Wall Street consensus. "H-P experienced a tough quarter. Looking ahead, H-P may face additional pressures. Shares will likely weaken in the short term. However, in our view, H-P remains strong in imaging and printing. We maintain our strong buy rating."

CSFB didn't see it that way at all. Analyst Kevin McCarthy, who had nice things to say about competitor Dell, blasted the company for dropping the ball. "H-P posted poor performance in nearly every operating group. While citing a slowing U.S. economy, the company took the blame for poor execution in several product areas," the analyst wrote. "We believe the stock will underperform in the next several quarters." McCarthy lowered its 2001 earnings per share to $1.55 from $1.65.

Additionally, Prudential Securities cut its 2001 earnings per share to $1.60 from $1.70 and its 2002 earnings per share to $1.90 from $1.93, while Goldman Sachs analyst Laura Conigliaro lowered her 2001 earnings per share estimate to $1.62 from $1.65.

Oh, and CSFB lowered its 2001 and 2002 forecasts on JDS Uniphase (JDSU) after a stern warning from Nortel (NT) rocked the tech sector. CSFB cut its 2001 earnings per share estimate to 68 cents from 73 cents, and its 2001 sales estimate to $3.6 billion from $3.9 billion. Going forward, CSFB cut its 2002 earnings per share forecast to 80 cents from 88 cents and its 2002 revenue call to $5.4 billion from $6 billion.

"We believe it is prudent to have more conservative estimates at this time given the deterioration in visibility in optical spending, particularly in North America," the company wrote in a memo to investors this morning. "We believe the lowered visibility encountered by Nortel is not an isolated event and anticipate that Lucent (LU) and Alcatel (ALA) may also be experiencing weakness."


Heidrick & Struggles (HSII): UP to strong buy from buy at Credit Suisse First Boston.

On Assignment (ASGN): UP to hold from buy at Credit Suisse First Boston.


ADC Telecommunications (ADCT): DOWN to neutral from buy at W.R. Hambrecht. "We believe the Company's vulnerability to high level capital spending issues and an increasingly difficult macro environment lead us to adopt a more cautious near-term stance on the shares."

At Road (ARDI): DOWN to buy from strong buy at Credit Suisse First Boston.

DPL (DPL): DOWN to hold from buy at Credit Suisse First Boston.

Embratel (EMT): DOWN to neutral from buy at Merrill Lynch.

Mutual Risk Management (MM): DOWN to hold from accumulate at Prudential Securities; price target: $15.

Navisite (NAVI): DOWN to long-term accumulate at Merrill Lynch.

Schering-Plough (SGP): DOWN to hold from buy at Credit Suisse First Boston.

Sharper Image (SHRP): DOWN to neutral from buy at W.R. Hambrecht.

Tellabs (TLAB): DOWN to buy from strong buy at Credit Suisse First Boston.


Extreme Networks (EXTR): NEW buy at Credit Suisse First Boston; price target: $55.

Foundry Networks (FDRY): NEW hold at Credit Suisse First Boston.

Redback Networks (RBAK): NEW buy at Credit Suisse First Boston; price target: $60.

SeaChange International (SEAC): NEW near-term accumulate, long-term buy at Merrill Lynch; price target: $28.

Washington Mutual (WM): NEW market outperform at Goldman Sachs.

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