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Cisco and Nortel slide on downgrades

Cisco Systems Inc. (Nasdaq: CSCO) and Nortel (NYSE: NT) were downgraded Thursday on concerns over declining spending on telecom equipment, which may cause trouble for the whole telecom sector, according to research from investment firm Sanford C. Bernstein; Nortel also inked deals totaling $525 million in China.

Shares in Cisco, a model company that has so far been unaffected by the rash of downgrades and warnings, were down 2.5 to 54.81, or 4 percent.

Cisco was downgraded to "market perform" from "outperform" by Sanford C. Bernstein; analyst Paul Sagawa said in a research note on Thursday morning that spending on telecom equipment is likely to show a "sharp deceleration" from 28 percent in 2000 to 20 percent in 2001. He also said that the first quarter ended October 31 will be "the last quarter of accelerating sales growth." Sagawa sees a prolonged period of top-line deceleration from the peak at 63 percent back to Cisco’s traditional guidance of 30-50 percent growth. He cites causes of the deceleration on 3 factors: deceleration in industry-wide carrier spending; more difficult compares for recently acquired Cerent, Aironet and ArrowPoint; and increasing competition in Cisco’s highest growth segments.

Sagawa reduced fiscal year 2001 estimates from 74 to 72 cents a share, and 2002 estimates from 94 to 91 cents a share - much lower that the Street's consensus estimate for earnings of 96 cents a share.

Nortel Networks Corp. (NYSE: NT) was downgraded from "outperform" to "market perform" on similar concerns. Sagawa said there was concern that the company "will be unable to sustain its 40 percent plus top-line growth rate in the face of sharply decelerating 2001 carrier spending."

In a research report, Sagawa added that Nortel’s sales growth is likely to decelerate to less than 30 percent for fiscal year 2001, based on Bernstein's analysis of likely carrier capital spending. The firm has lowered its 2001 earnings estimate from 96 to 94 cents a shar; the Street's consensus is 98 cents a share.

Based on the firm's study, which suggests that growth in sales of telecommunications equipment will decelerate from better than 28 percent in 2000 to less than 20 percent in 2001, Sagawa also downgraded several other firms. Bernstein reduced Ericsson (Nasadaq: ERICY) to "underperform," and has reduced revenue and earnings expectations for Lucent (NYSE: LU), Motorola (NYSE: MOT) and Nokia (NYSE: NOK). It has not changed expectations for Palm (Nasdaq: PALM) or 3Com (Nasdaq: COMS).

  • Nortel, whose shares were off 1.19 to 58.44, also announced Thursday contracts valued at about $525 million for new wireless network build out expected to serve up to 17 million subscribers in Greater China. The awards include a $250 million expansion of Chunghwa Telecom's Taiwan-wide GSM 900/1800 dual-band digital cellular network, and $275 million in new network builds and expansions by China Unicom in the People's Republic of China.

    Nortel will provide Chunghwa Telecom with more than 1,900 new GSM 900/1800 base stations, enabling it to deploy Wireless Internet services by August 2001. The enhanced network is expected to fuel a whole new wave of growth and profitability by creating an advanced platform for new generation mobile content, commerce and eBusiness services and applications, the companies said.