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Downgrade batters networking stocks

UBS Warburg analyst Nikos Theodosopoulos downgrades several networking equipment stocks, saying U.S. telecom companies will continue to cut back on spending in 2001.

UBS Warburg analyst Nikos Theodosopoulos downgraded several networking equipment stocks, saying U.S. telecom companies will continue to cut back on spending in 2001.

"We believe the group is stuck in a trading range for the next two quarters and perhaps longer," Theodosopoulos wrote. "While we do not think there is material downside in the group as most of the 'bad news' is in the stocks, the poor telecom capital spending environment just makes it hard for us to keep formal buy ratings on these stocks.

"We look to upgrade the stocks if we are convinced 2002 will be a better year."

He cut ratings on ADC Telecommunications, Avici Systems, Cisco Systems, Ciena, Juniper Networks, Nortel Networks and Tellabs from "buy" to "hold."

He also lowered price targets, cutting Nortel from $20 to $18, Cisco from $24 to $20, ADC from $12 to $10 and Avici from $25 to $15.

Though all these companies' shares slipped earlier in the day, some recovered by market close: ADC fell 16 cents to $7.50, Avici moved back up to Tuesday's closing price of $11.37, Cisco lost 53 cents to $15.73, Juniper rose 85 cents to $57.85, Nortel fell 34 cents to $15.16, and Tellabs lost $1.59 to $31.50.

Several of these companies have issued warnings amid a sharp drop in spending. Cisco issued a profit warning earlier this month, saying it expected fourth-quarter revenue to be flat to down 10 percent sequentially.

Tellabs in its warning said it expects revenue to be more than $100 million less than predicted. Theodosopoulos noted that the 10 largest U.S. telecommunications carriers, which together account for 70 percent of capital spending in the United States, have already spent 25 percent of their planned capital budgets.

"The U.S. capex (capital spending) data suggests that the remaining quarters in 2001 will not be much better than (the first quarter) in terms of telecom equipment revenues. While companies are all getting their cost structures in line through layoffs and other restructuring efforts, we believe the stocks will remain in a trading range until there is some confidence of capital spending growth," Theodosopoulos wrote.