The weak economy is catching up to the telecom industry, analysts said Wednesday, slashing ratings on half a dozen equipment suppliers and an operator.
Credit Suisse took a global look at carrier spending, and concluded that at least one major operator will reduce its planned capital expenditures for the rest of the year. Analyst Paul Silverstein is most concerned about AT&T Inc., which accounts for 28 percent of U.S. telecom capital spending and 7 percent globally.
"Virtually every supplier to carriers of communications equipment has exposure to AT&T," Silverstein wrote in a note to clients.
Credit Suisse downgraded equipment suppliers Cisco Systems Inc., Ciena Corp., Adtran Inc., ADC Telecommunications Inc., and Optium Corp.
Cisco was cut to "Neutral" from "Outperform", and its price target was slashed to from $31 to $24, based on Credit Suisse's new annual pro-forma profit estimate of $1.59 per share, down from $1.72.
AT&T contributes more than $500 million, and perhaps as much as $1 billion, to Cisco's annual revenue, Silverstein wrote. Nevertheless, he still considers Cisco "best in class" and a good value for long-term investors.
Cisco shares fell 6 cents to $20.98 in morning trading, earlier reaching a new low of $20.56.
Shares of Ciena Corp., a maker of optical networking gear, fell 12 cents to $20.29 and hit a new low of $19.30, after Credit Suisse cut its rating to "Underperfom" from "Outperform."
The smaller companies encompassed by the downgrade were harder hit. Adtran shares fell $1.68, or 7 percent, to $22.31. ADC Telecommunications fell 79 cents, or 6 percent, to $12.49. Optium Corp. bucked the trend, edging up 9 cnets to $7.60.
Credit Suisse maintained its "Neutral" rating on Nortel Networks Corp., but trimmed its price target to $7 from $8, based on a pro-forma annual profit estimate of 43 cents per share, down from 47 cents per share. Nortel shares were unchanged at $6.43.
On the carrier side, shares of Sprint Nextel Corp. retreated from Tuesday's rally, sparked by a CNBC report that it was in talks to be bought by SK Telecom Corp. of South Korea. Analysts gave the deal long odds, pointing out that the putative acquirer is smaller than Sprint, and is unlikely to be able to borrow enough money because of the credit crunch.
Sprint shares fell 59 cents, or 6.6 percent, to $8.45.
Separately Mike McCormack at JPMorgan downgraded TW Telecom Inc. to "Underweight" from "Overweight." Also known as Time Warner Telecom, the company serves mainly business customers, who McCormack believes will tighten their belts due to the weak economy.
TW Telecom fell 82 cents, or 5.6 percent, to $13.92 and hit a new los of $13.61 earlier in the session.
The country's largest carrier, AT&T, is set to report second-quarter earnings next Wednesday. Banc of America Securities analyst David Barden expects the results to reflect increased competition from cable phone services as well as the weak economy.
Sanford Bernstein analyst Craig Moffett took the opposite tack in a morning research note, saying that weak results from phone companies in the second quarter "is perhaps the world's worst kept secret."
He upgraded AT&T three weeks ago, in part because investor expectations are now low.
"The question to ask now is, have investors over-reacted?" Moffett wrote.
AT&T shares were down 18 cents at $31.77.
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