DSL stocks were hammered Wednesday after equipment vendors Efficient Networks (Nasdaq: EFNT) and Turnstone Systems (Nasdaq: TSTN) issued fourth quarter profit warnings.
Turnstone, down 1.44 to 5.13, cut its fourth quarter expectations for the second time Tuesday. Efficient Networks, down 4.38 to 7.94, also said its second quarter results will be lower than expected. Late last week, Carrier Access Corp. (Nasdaq: CACS) warned about its upcoming fourth quarter.
Wall Street reaction to the warnings was mixed.
Robertson Stephens analyst Paul Johnson overhauled his ratings on all companies his firm follows in the DSL space. He downgraded Turnstone, Efficient, Paradyne (Nasdaq: PDYN), Elastic Networks (Nasdaq: ELAS), Copper Mountain (Nasdaq: CMTN), Advanced Switching Communications (Nasdaq: ASCX), Tut Systems (Nasdaq: TUTS) and Aware Inc. (Nasdaq: AWRE) to "long term attractive" from "buy." Most of those stocks moved lower in early trading.
"Despite our bullish outlook on the overall market for DSL, it is clear to us that the market is more volatile that we had ever suspected. We recognize that lowering our ratings at this point may seem a little too little, a little too late," the analyst said in the report.
Johnson said DSL growth expectations remain strong for the long-term, and that demand is not an issue. The main problem this year was the difficulty that independent carriers had in gaining market share from the ILECs (incumbent local exchange carriers) and traditional carriers. Weaker upstarts had to delay or cancel DSL deployment plans.
Efficient is taking a hit even though many of its customers are traditional carriers. Though Johnson said he believes Efficient's problems are temporary, the "volatility may last for many quarters."
Deutsche Banc Alex Brown analyst George C. Notter reduced estimates while maintaining a "market perform" rating on Turnstone. Along with Carrier Access and Efficient, Turnstone's warning indicates continued deterioration in the CLEC (competitive local exchange carrier) marketplace.
"The key issue is continued pushouts and cancellations of orders by many of the company's CLEC customers. Over 12 of Turnstone's meaningful customers have now cut back spending forecasts with the company," Notter said in a research note.
Notter took down his figures for 2000 and 2001; earnings per share are now expected to be 49 cents and 10 cents a share, respectively, compared to previous expectations of 53 cents and 35 cents a share.
Notter added that he expects to see "ongoing difficulties for equipment providers selling into this market as carriers continue to pull back capital spending and network expansion plans."
U.S. Bancorp Piper Jaffray analyst Frank R. McEvoy kept his "neutral" rating on Turnstone and predicted that the stock will trade below his newly lowered price target.
McEvoy also cut his price target from $18 to $8 a share, based on cash per share of approximately $5 per share plus 2 times calendar year 2001 revenues of $100 million.
He said he'll be monitoring the stock closely for its penetration into the ILEC market, and "would be inclined to increase (its) rating and price target if/when that takes place."
McEvoy added that while the near-term outlook is uncertain, Turnstone is attractive considering its current share price relative to cash and its first-mover advantage in the DSL market.
• Turnstone cuts 4Q expectations again
• Efficient Networks sees weak sales ahead
• Profit warning sends Carrier Access into tailspin>