Investors skeptical of recovery for networkers

Jim Christie

SAN FRANCISCO: A powerful blast of bullish news from Cisco Systems Inc. last

week will not by itself reverse depressed investor sentiment for network

equipment vendors, according to analysts, who noted the benchmark proxy for the

long-suffering sector is near a seven-year low.

By the end of last week, investors had decided that bad news from WorldCom

Inc. and International Business Machines Corp. overshadowed Cisco's cautiously

optimistic view for sales growth, analysts said.

The result was a nasty reversal for the American Stock Exchange Networking

Index.NWX

, which dropped back on Thursday and Friday as attention returned to the capital

spending crunch that has dragged down shares of many once high-flying network

gear makers, analysts said.

"We may not get back to record lows, but we still have to work our way

through some quarterly reports that will be tough and where expectations will

have to be scaled back," said William Becklean, a Commerce Capital Markets

analyst.

"Service providers and enterprises have ended up with overcapacity and

their earnings are under pressure so they're not spending unless they have to

spend," Becklean said. "I don't think we'll see a pick up in capital

spending until sometime next year."

The tough market facing network gear makers has weighed on the American Stock

Exchange Networking Index, which has trended lower since January and touched

191.28 on Tuesday, its lowest level since September 1995.

The index jumped on Wednesday to close at 215.92 as investors cheered Cisco's

fiscal third-quarter report released after market hours on Tuesday. But the

rally did not last long. The index closed on Friday down 2.9 percent at 201.63,

85.6 percent below its all-time high of 1,401.26 on Sept. 1, 2000.

Reality check in order



Network equipment makers -- such as Cisco rival Juniper Networks Inc. and
smaller companies such as Extreme Networks Inc. -- must show signs sales are

recovering to win investors back, said Tad La Fountain, an analyst with Needham

& Co.

"They require a more favorable outlook on capital spending in both the

enterprise and carrier segments," La Fountain said. Cisco did not provide

any assurance that a broad recovery was underway when it said its current

fourth-quarter revenues would be "flat with a slight upward bias"

compared to third-quarter revenues of $4.82 billion, Becklean said.

As for Wednesday's Cisco-inspired rally among shares of network gear makers:

"It was completely overdone," he said. Wishful thinking drove the

rally, said Mark Sue, an analyst with Frost Securities Inc. "The networking

industry and the broader tech market was craving good news," Sue said.

"That's why we had a magnified trading day after Cisco's earnings

results."

"Now people understand it was a little overextended given one has to be

very careful about the state of the service providers and the pace of

information technology spending by large corporations here and abroad," Sue

said.

By Friday, those familiar forces were again weighing on network gear makers'

shares, Sue said. Those included jitters after ratings agencies slashed $32

billion in WorldCom debt to "junk" status, citing the long-distance

telephone company's huge debt load and expectations of further weakness.

Network gear suppliers already were concerned about how WorldCom's investment

plans. WorldCom last month cut its 2002 capital spending budget to $4.5 billion

from between $5 billion and $5.5 billion.

This week WorldCom said it could cut another $1 billion from its capital

spending as it looks to shore up its balance sheet. Additionally, International

Business Machines Corp., the world's largest computer maker, on Friday was

reportedly set to cut up to 3 percent of its 318,000-strong work force in it

biggest layoffs in a decade amid stagnant sales.

"IBM's headcount reduction just goes to show the corporate demand

outlook for technology appears moderated," Sue said.