The storm seems to have passed for the telecom-equipment stocks, but no one's expecting to see the sun during this month's earnings parade.


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kicks off year-end earnings reports Tuesday, to be followed by








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Illustrating the steep decline of the telecom business, all these companies are expected to report earnings and revenue far below year-ago levels when they post year-end numbers.

In fact, over the last month, evidence that the telecom business is in tatters has continued to accumulate. All the equipment suppliers already have either warned that sales and earnings are even weaker than Wall Street was expecting, or declared that sales trends remain too foggy to forecast. Meanwhile, their big customers, the Baby Bells, have continued to cut their capital spending budgets. Yet after 18 months of free fall, the networking stocks have stabilized, which has plenty of longtime telecom industry bears changing their tune.

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"The turning point for me was when we saw Lucent preannounce the world's crappiest quarter, a 30% revenue shortfall," says Friedman Billings Ramsey analyst Susan Kalla, who flipped her Lucent rating to buy from sell last week. "And yet the stock was back up in three weeks."

This from Kalla, whose renown stems from a penchant for making prescient bearish calls early. For instance, she was predicting a three-year industrywide spending slump even when the telecom spending binge of the late 1990s had yet to draw to a close.

Taking the Plunge
Earnings (top) and revenue decline at big gearmakers

Source: Company reports, Thomson Financial/First Call estimates.

Clearly, Kalla isn't alone in the ex-bear cave. Sanford Bernstein analyst Paul Sagawa also has reassessed his views, saying he doubts the big companies will go much lower.

"The Street has gotten way too negative at this point," says Kalla, who has a buy on Nortel and a sell on Juniper and whose firm has no underwriting ties. "The storm is over. The Baby Bells have won and their big suppliers are going to make it."

Helium, Please

That said, the analysts' sudden conversion owes less to improving fundamentals than to a sense that Wall Street has gotten too negative on a consolidating group. That means that these stocks appeal to most analysts not because of some great upside potential, but because it seems like they can't go down much further.

The network-equipment stocks rose to great heights in the tech-buying binge that peaked around midyear 2000. But the emerging telco industry that fed so much of the industry's growth collapsed in the latter half of that year, deeply reducing the demand for the routers and switches that direct voice and data traffic. The nationwide recession and a capital spending pullback have since throttled the money flow even from the richest telcos, the Baby Bells.

In a sense, the continued hardship of the broader telecom industry remains the strongest card for the big network-equipment suppliers. Chuck Thomas, senior tech analyst with Dreyfus funds, expects to see big telco suppliers such as Lucent, Cisco and Nortel crowding out smaller, weaker rivals. "The stars are aligning for the primary suppliers, but these are pretty dim stars," says Thomas, whose fund holds Cisco and Nortel.

Cisco last week offered some support to this winner-takes-all theory. While declining to offer his typically optimistic sales guidance, CEO John Chambers told investors at a tech conference that his company would soon deliver dramatic market share gains.

"Potentially, Nortel and Lucent are simply deep, deep value-type plays," says Osborne Partners Capital Management's Justin McNichol, whose firm owns Cisco shares. "That's if you assume the news is so awful it can't get much worse."

Most people seem to nowadays.