From: Linda (firstname.lastname@example.org)
Date: Sat Sep 23 2000 - 06:07:30 PDT
[Hmmm....not sure what to make of this. Given the performance of some
of these stocks yesterday (Extreme up 18%, Nortel up 10%, Juniper up
6%, and the others mentioned here basically flat on close), it doesn't
seem like institutional players are especially worried. But there are
some interesting points made, worthy of long term consideration.
Don't Underestimate the New Telecom Troubles
By Jim Seymour
Special to TheStreet.com
9/22/00 7:30 AM ET
I was glad to see Jim Cramer repent a little in Thursday morning's
RealMoney.com Columnist Conversation on his disdain for the
importance of continuing reports of capital-expenditure declines
in telcos -- because I was about to go after the boy on this,
taking the other side of the trade, perhaps with a little
bad language thrown in.
I think what we're seeing now in telco shrinkage -- revenues
and prices, as well as stock prices -- is genuinely bad news,
and portends trouble well beyond the borders of TelcoLand.
This is bad news especially, I think, for such telco suppliers
as the Big Three -- Cisco (CSCO:Nasdaq - news - boards),
Nortel (NT:NYSE - news - boards) and Lucent (LU:NYSE - news
- boards) -- and the Six Dwarfs -- Juniper (JNPR:Nasdaq - news
- boards), Foundry (FDRY:Nasdaq - news - boards), Copper
Mountain (CMTN:Nasdaq - news - boards), Extreme (EXTR:Nasdaq -
news - boards), Redback (RBAK:Nasdaq - news - boards), and
Sycamore (SCMR:Nasdaq - news - boards).
Some data points to consider:
Pricing on long-distance voice service continues to fall. The
decline may be slowing a little, and some even say it has
stopped (though I don't see that in the numbers). But over the
next two years, long-distance voice service, especially
residential long-distance service, is headed for a $0
per-minute pricing. It will be the giveaway used to buy
customers for presumably higher-value-added/higher-margin services
--but many of those businesses aren't so hot, either. And it won't
be a cheap giveaway: There are still real costs in long-distance
service, especially for those telcos (nearly all) with sizable
chunks of out-dated circuit-switched equipment.
While prices are falling, telco revenues are, at best, flat.
The Competitive Local Exchange Carriers (CLECs)? Don't even ask: a
The domestic telco companies are investing $300 billion-plus this
year. With revenues flat, that's not sustainable.
This year the telcos' return -- the inverse return -- in terms of
new revenue for every new dollar invested is 1:3. That's right:
Telcos are spending three times as much in capital expenditures as
they're gaining from that investment in new revenue. And it looks like
that inverse return will be 1:4 next year.
The big telcos simply have to cut back on their capital expenditures.
Again: This is not sustainable. Viewed in terms of revenue, the U.S.
telco business is already massively overcapitalized.
Consolidation is picking up speed. US West is gone to Qwest, and I
don't expect to see Qwest independent much longer. AT&T may not be
in its traditional long-distance business soon, selling that off to
try to get the company back on track. Sprint is desperate for a
partner after the failed WorldCom deal. Overseas, Sonera, the Finnish
national telephone company, is being fought over by Deutsche
Telekom, France Telecom and others. Within a few years, I expect to
see other European national telcos fall, with the emergence of a
Pan-European mega-telco. Political issues make this difficult to
imagine right now, but British Telecom and maybe Spain's
overly-ambitious Telefonica seem likely to be among the first to
be absorbed into that Euro-maw. (Skeptics should recall the course
of the "impossible" DT-Italia Telecom deal.)
With fewer buyers out there, fewer pieces of telecom gear will be
bought. That will hurt the tel-tech outfits, badly.
The tel-tech-gear makers already have to finance -- in many cases,
the word should be subsidize -- their telco customers' purchases.
Even if you lay that debt off quickly on third parties (at an
increasingly high cost, further hurting revenues), there is a limit
to the amount of vendor financing the telecom suppliers can provide.
The domestic telcos have, almost without exception, been beaten down
already. Not just the obvious dead men walking, like AT&T and
WorldCom, but look also at the price for Verizon (VZ:NYSE - news
- boards). Only SBC (SBC:NYSE - news - boards) and BellSouth
(BLS:NYSE - news - boards) look even halfway healthy -- and they're
down sharply, too.
It gets worse. Beyond the current and future damage to the telcos
themselves, and the coming erosion for their tel-tech suppliers,
consider what's going to happen in the market as this telco/tel-tech
train starts to slow. We've relied on those industries for much of
the market energy of the past two years -- and no healthy
replacements are in sight.
I think there's a real chance a precipitous fall in telcos and
tel-techs will trigger a marketwide slide.
I've been saying since May that I thought we'd see a quiet summer,
then things would pick up after Labor Day, and after a month or
so of choppiness, we'd take off again, with the Nasdaq ending the
year not far off its early-2000 highs.
I still hope for that, but the rational mind says it no longer
seems very likely.
I've scaled out of my tel-tech positions except for Lucent and
Cisco, and hold only two small telco positions, in Qwest and WorldCom.
I think it's time to take profits where you have them in telecom,
broadly defined. And to eat some losses, too, if you have them,
before they get worse. It's not going to get better anytime soon.
We've gotta look for some new horses. Can't ride these anymore.
Jim Seymour is president of Seymour Group, an information-strategies
consulting firm working with cor-porate clients in the U.S.,
Europe and Asia, and a longtime columnist for PC Magazine.
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