Optical stocks sink on downgrade

Optical-networking companies may have seen their stocks rebound slightly in the past few weeks, but the sector won't recover until the year's end, an analyst says.

Optical-networking companies may have seen their stocks rebound slightly in the past few weeks, but the sector will not recover until at least the end of the year, a Morgan Stanley analyst wrote in a research note Wednesday.

Analyst Alkesh Shah downgraded Tellabs, JDS Uniphase, Nortel Networks and Sycamore Networks to "neutral" from "outperform."

Shares slumped by market close: JDS was down $2.23 to $16.94, Tellabs lost $3.45 to $33.93, and Sycamore was down $1.24 to $8.99.

Shah cited "40 data points" taken from interviews with carriers, systems vendors and component companies. The companies being downgraded all make fiber-optic products used by telephone companies, cellular service providers, cable operators and utilities. Those companies have been hurt by a significant drop in spending by the telecom companies.

Shah wrote that although investors and analysts think that market will bottom out in the third quarter, the "best case scenario for a recovery in optical systems stocks would take place in late 2001/early 2002."

But a recovery could get pushed back even further given "weak systems sales and downward pressure on prices," he wrote.

"We expect optical networking companies to report bleak results for (the second quarter of 2001), weak orders for (the third quarter) and no evidence of impending recovery," Shah wrote. The bad news could continue into the fourth quarter, he added.

Service providers have raised more money, but it's being used to pay down and refinance existing debt. And any money that is being spent on capital projects has focused on wireless and cable projects, Shah wrote.

Shah's views were echoed by a new report from UBS Warburg analyst Nikos Theodosopoulos, who said that he continues "to believe that capital spending on telecom equipment has not improved in general for the industry."

Theodosopoulos also noted that one of Tellabs' largest customers has cut back on the size of its orders.

In addition to his downgrades, Shah cut revenue estimates for JDS from $700 million to $695 million for the fourth quarter and dropped earnings estimates for that quarter from 5 cents per share to 4 cents. He dropped earnings estimates for 2001 from 31 cents per share to 21 cents, and for 2002 from 47 cents per share to 28 cents.