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Foundry hammered on warning, downgrades

    Networking gear maker Foundry Networks' (Nasdaq: FDRY) shares were cut in half Wednesday after the company issued a fourth-quarter warnings and got slapped with some downgrades.

    After the bell yesterday, the company said its fourth quarter numbers would fall short of analyst estimates. The company blamed the decline on a slowdown in capital spending by Internet service providers and e-commerce sites. Shares of Foundry were sliced 15.19 to 15.44.

    SG Cowen, Merrill Lynch, and ABN Amro all downgraded the stock. Chase H&Q was more forgiving, maintaining its rating but cutting estimates.

    At SG Cowen, analyst Christin Armacost cut the stock to "neutral" from "buy". Armacost also downgraded Foundry competitor Extreme Networks (Nasdaq: EXTR), down 14.63 to 33.94, from "buy" to "neutral" casting a cloud on the outlook for the entire sector.

    Michael E Ching at Merrill Lynch downgraded the stock to near-term "neutral" from near-term "accumulate" but reiterated his long-term "buy" rating. He also reduced 2001 earnings per share (EPS) estimates.

    In a research note, Ching wrote that the company's prospects will be impacted by the slowdown in capital spending generally and by competition from Cisco (Nasdaq: CSCO) in particular. "There is much uncertainty on Foundry's near-term outlook, but we don't expect trends with the emerging providers, or the competitive environment to change any time soon," he added.

    ABN Amro also lowered its rating on the stock from "buy" to "hold". Analyst Kenneth M. Leon cut his estimates for the company's fourth quarter, fiscal 2000, 2001 and 2002.

    The analyst acknowledged Foundry's high mix of Internet Service Providers (ISP's) E-commerce site customers was detrimental to the company's performance. According to Leon, "PSI Net was a good early indicator we failed to take notice of. We now believe the problems are systemic for the entire ISP market."

    At Chase H&Q, the news was slightly more positive. Analyst Erik Suppiger maintained a "buy" rating on the stock but lowered estimates.

    "While management did not comment on whether its enterprise market materially contributed to the shortfall, our channel checks suggest that demand in large, medium and small business markets for networking equipment remains in tact. Accordingly, we are assuming that Foundry's enterprise business remains in tact," Suppiger noted in his research.

    Also Wednesday, Foundry said it has inked a co-branding resell agreement with Lucent Technologies (NYSE:LU) under which Lucent will resell Foundry's Web switches on a worldwide basis. Terms of the deal were not disclosed.