Networking Stocks Slide as Researcher Adds to Slowdown Talk - TheStreet

A new telecommunications spending report rebuffs

Chicken Little but supports the emerging view that growth has peaked.

Though the sky isn't falling, it is no longer the limit for these stocks. The report -- released Monday by

RHK

, a leading market research firm -- confirms what some in the industry have been saying for two months: Equipment buyers are feeling a chill, fueling fears of a flu epidemic across the equipment-selling sector.

The repercussions of this view and a negative report from

Lehman Brothers

were apparent in the market Monday.

Cisco

(CSCO) - Get Report

fell $4.93, or 9%, to $45.62, while

Sycamore

(SCMR)

dropped $7, or 10%, to $58.50 and

Redback

(RBAK)

dropped $12.50, or nearly 11%, to $101.50. The selloff comes after a week in which many of the sector's big stocks lost as much as a quarter of their value following a revenue shortfall at

Nortel

(NT)

.

Big Enough?

North American spending will rise 21% to $133 billion in 2001, according to projections by RHK, which surveyed more than 100 global phone and Internet service providers. For 2000, growth is estimated at 38%, to about $110 billion.

This flattening growth trend jibes with the evidence

TheStreet.com

has previously reported: Big network equipment spenders such as

AT&T

(T) - Get Report

,

Worldcom

(WCOM)

,

Williams

(WCG) - Get Report

are

easing their

free-spending ways.

Lehman Brothers analysts cited the RHK report as they discussed the cash crunch with clients on a conference call Monday morning. Lehman cut price targets for 14 of the 17 equipment companies it covers as it explored the impact of the weakening communications service sector. Some of the companies getting price reductions were Cisco, to 65 from 90; Sycamore, to $150 from $200;

Terayon

(TERN)

, to $85 from $165; and Redback, to $150 from $200.

Still, both RHK and Lehman attempted to put a positive spin on the slowdown. RHK pointed to its projections that U.S. spending on optical networking equipment will grow by 40% in 2001, though that represents a marked slowdown from the 62% growth expected this year.

And some Lehman analysts almost welcomed the bracing effect of the funding squeeze, saying it was necessary to cull the weaker players from the market and help companies shift toward heavy sales and away from heavy spending.

Taking a Bath
Big telcos' big selloff

Lehman's Blake Bath was the first of the sell-side analysts to call attention to this spending trend. Bath issued a report early last month calling the spending growth

unsustainable.

I'll Have Another

According to the Lehman report, the telecom-services industry next year will spend one dollar on capital equipment for every two dollars it generates in revenue. That marks a dramatic increase from 1996's 1:5 ratio, and this year's 1:3.

Another sobering report of the sector's ailing health came last week, when Worldcom told investors it would take a $405 million charge to cover potential nonpayment from 17 wholesale customers that fell into bankruptcy protection last quarter. The company says a more typical bankruptcy rate is three or four companies per quarter.

Worldcom also figured into Nortel's frightful earnings report last week. According to industry observers, it was Worldcom that double-ordered optical equipment from Nortel last quarter. That hoarding earlier in the year caused what turned out to be an unsustainable uptick in sales, which meant that a return to normal levels of optical equipment sales growth appeared as a slowdown. That caused Nortel to miss the Street's revenue expectations and the optimistic $12 billion target for optical sales in 2000.

The episode only helps point up the dependence between buyers and sellers.

To be sure, with telecom services stocks near their recent lows and the bond market fleeing telecom loans, there will be more than sniffles ahead for the sector.