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Telco suppliers can recover

In order to explain why things aren't so bad for such companies, one must look at the heavy selling that has hurt them recently.

The great bull run for the telecommunications equipment makers is over, right? Not so fast. In order to explain why things aren't so bad, one must look at the heavy selling that has hurt these companies recently.

Bruised and battered
Investors are running for cover, concerned about global economic turmoil and analysts' predictions that U.S. companies will report weaker third-quarter earnings. Shares of leading telecom equipment providers, such as Lucent Technologies and Northern Telecom, lost 15 percent and 23 percent of their value, respectively, since the beginning of the week. Smaller vendors were equally hard hit. ADC Communications' stock, for example, dropped 21 percent during last few days, to 20.19 per share.

The suffering endured by telecommunications equipment companies is not simply due to a jittery market. In September, a number of manufacturers pre-announced shortfalls for the quarter ended on September 30. Alcatel said it would fall short of expectations because of a slowdown in orders from European and Asian carrier customers. Earlier that same month, Ciena and Tellabs made similar announcements.

Northern Telecom (Nortel), a Canadian telecom equipment maker, also warned analysts that its second-half revenue growth would be lower-than-expected, primarily due to decreased expenditures in Europe and Asia. In the meantime, Nortel announced that its earnings for the third quarter and for fiscal 1998 should be in line with expectations.

As a greater number of companies pre-announce weaker results, investors are growing concerned that European and Asian problems will eventually reach the United States. However, contrary to the widespread belief among some industry insiders and investment experts regarding reduction in capital expenditures on telecommunications equipment, Lucent's management continues to insist that the company did not experience any slowdown in orders and that its fiscal 1998 revenue and earnings results will meet expectations.

Lucent's management is not alone in its optimistic outlook for the industry. Analysts at Warburg Dillon Read believe that "Alcatel's woes do not equal a global meltdown. [Warburg Dillon] does not believe the problems faced by Alcatel will impact most other telecom equipment companies."

Lucent shares are trading at 31 times the fiscal 1999 EPS estimate of 2.03. Important to remember also is that, during the last five quarters, management has been able to deliver bottom-line performance that beat estimates by an average of nearly 26 percent.

Bottom line
Assuming that worries about a slowdown in the U.S. telecommunications market are overblown, Lucent's stock looks attractive at 63.50.

Individual Investor Online is a periodic contributor to CNET NEWS.COM.

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Story Copyright © 1998 Interactive Investor Group. All rights reserved.

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