Banc of America Drops Forecast for Telecom Gear Makers

Investors in the telecommunications equipment space should pack a helmet and brace themselves for a bumpy ride. According to Banc of America Securities analyst Christopher Crespi, poor industry fundamentals, a nasty economic climate, pricing pressure and crumbling capital expenditures will eat into the industry's gross profit margins. As a result, the analyst lowered his earnings expectations on six telecommunications equipment makers today.

Several of the biggest names in the industry had their earnings estimates trimmed below the current Wall Street consensus forecast. Those affected were Alcatel (ALA), Cisco (CSCO), Corning (GLW), Corvis (CORV), JDS Uniphase (JDSU) and Tellabs (TLAB).

Capital expenditure budgets, the lifeblood by which gear makers subsist, are the single biggest concern for Crespi. Not long ago, Crespi figured that 2001 capital spending would fall 4% from 2000 and pretty much bottom out -- a signal that things would be getting better and not worse. But now, the analyst said that capital spending will drop 9% year-over-year. Making matters worse is that carriers, in his view, are putting pressure on component suppliers to lower prices, thus reducing profit margins, something the analyst said wasn't yet factored into guidance from the companies.

Lucent (LU) got hit even harder, as the analyst downgraded the stock to buy from strong buy, citing the troubled Agere initial public offering, which was repriced three times and delayed, failing to provide the windfall Crespi expected. "Due to a weak component market, the pending Agere spinout failed to serve as a near-term catalyst, which was our primary reason for maintaining our previous rating," he wrote in a research note.

The Deep Six
Company	New 2001 EPS Estimate	2001 Wall Street Consensus	Rating
Alcatel	$0.68	$1.30	buy
Cisco	$0.18	$0.17	buy
Corning	$0.80	$0.90	strong buy
Corvis	($0.27)	($0.24)	buy
JDS Uniphase	$0.29	$0.32	buy
Tellabs	$1.35	$1.50	buy

*Estimates are for the 2001 calendar year and come courtesy of Thomson Financial/First Call.

Going forward, Crespi's view of the industry is rather bleak. He thinks that strong sales in newer, more advanced equipment offered by Tellabs, Nortel (NT), Lucent and Alcatel won't do much to offset the stronger decline in sales of legacy equipment. And Cisco, the linchpin of the industry and much of the tech world, is tied to the performance of the macro economy, he said, creating a situation where all these boats will rise with the tide -- not before it.

Crespi's bottom line -- buckle up. "Investors owning communications equipment stocks should brace themselves for several quarters' worth of pricing discounts, market share battles and inventory write-downs," he wrote. "In our view, the result of such a scenario will inevitably lead to margin pressure and significantly curtailed top- and bottom-line growth rates for our companies."

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