Contract Manufacturers and Chip Stocks Feel Nortel's Pain

Author:: John Raess
Publish date:: Feb 16, 2001 2:23 PM EST

Coming shortly after optical networker

Ciena's

(CIEN) - Get Report

pedal-to-the metal earnings report,

Nortel's

(NT)

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) - Get Report

, 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)

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)

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)

, 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)

and

PMC-Sierra

(PMCS)

Electronic manufacturing companies, which assemble parts into products for companies on a contract basis, also were dragging. Hardest hit:

C-Mac Industries

(EMS)

, 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)