NEW YORK (CNN/Money) -
Wow. Telecom equipment investors must have had some sore arms Thursday morning.
That's because they were probably pinching them quite vigorously to make sure they were not dreaming after Thursday's good news trifecta. That couldn't have been real, right?
- Cell phone market leader Nokia (NOK: Research, Estimates) raised its fourth quarter sales and earnings guidance. But the best news wasn't that the handset business had a strong quarter, but that the company's networking unit, which many investors had written off, was expected to post a healthy operating profit. Nokia's stock surged 13 percent on the news.
- A smaller wireless equipment company named Andrew (ANDW: Research, Estimates), which makes antennas, power amplifiers and filters, said that its current quarter's sales and earnings would be substantially higher than expected thanks to what the company described as "a continuation of the encouraging overall industry trends." Shares skyrocketed 26 percent.
- Finally, Verizon Wireless, the nation's largest wireless carrier, announced that it was planning to spend $3 billion during the next two years to upgrade its high-speed data networks nationwide. That news sparked a nice pop in stocks that could likely win some of this Verizon largesse. Nortel (NT: Research, Estimates) gained nearly 8 percent. Lucent (LU: Research, Estimates) rose more than 12 percent. And Ericsson (ERICY: Research, Estimates) rose nearly 16 percent.
So has telecom finally bottomed out? That appears to be the case, at least on the wireless side.
Networking out from the abyss
Investors should be thrilled that Nokia's networking unit has bounced back. Casey Ryan, an analyst with Wells Fargo Securities, said that the strength there seems to indicate that carriers are finally starting to spend on so-called 3G wireless networks, specifically in Europe.
In addition, the Verizon announcement shows that advanced wireless data networks are closer to becoming a reality in the United States too. That bodes well for Ericsson, Lucent and Nortel.
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But investors still need to proceed with caution: the magnitude of the rebound in business isn't yet clear, and though telecom stocks have gone up across the board, not all will benefit equally from recent developments.
T. Michael Walkley, an analyst with RBC Capital Markets, said that while he does think wireless equipment stocks have bottomed, investors shouldn't read too much into fourth quarter numbers since there may have been a so-called "budget flush" by carriers, a short-term flurry of buying before the closing of year-end books. The key, Walkley said, is whether companies give bullish guidance for the first quarter, typically a weak one for telecoms.
Ryan said investors should be selective. Shares of networking equipment firm Remec (REMC: Research, Estimates), for example, jumped 6 percent on Thursday, but it is still losing money. And Powerwave Technologies (PWAV: Research, Estimates), which competes with Andrew, soared 16 percent on Thursday even though Ryan said his hunch is that only a handful of companies will wind up as winners from new contracts.
Strong holiday sales of phones. What next?
Looking more closely at the handset news, the big surprise from Nokia was not that there was a surge in the actual number of cell phones sold but that the higher-priced models finally started to move off the shelves.
Ren Zamora, an analyst with Loop Capital Markets, said that Nokia's average selling prices for its mobile phones increased from the third quarter, after several quarters of sequential declines.
"All Nokia cared about earlier in 2003 was volume and market share," Zamora said. "The company finally has taken a step back and focused more on prices."
However, there are some concerns about sustainability. Greg Gorbatenko, an analyst with independent research firm When2Trade, said U.S. carriers have built up cell-phone inventories in the hope that first-quarter sales will be stronger than usual due to the recent rule changes that allow customers to switch their service but keep their number.
Gorbatenko said that since volume was not that much higher than expected in the fourth quarter, it appears number portability might not be driving cell phone sales that much, which could lead to a sharp drop in demand in the first quarter and excess inventory. If that's the case, a natural reaction is to cut prices.
Yes, the outlook for telecom equipment looks much better now than it did at this time last year. But since many of the stocks ran up so dramatically last year and are off to a blazing start in 2004, investors should probably not chase these rallies.
It might be better to wait and see what the companies have to say about their first quarter expectations before jumping in to the telecom equipment pool.
"The telecom slowdown is probably over but that doesn't mean everyone can come out from hiding," Gorbatenko said.
None of the analysts quoted in this piece own any of the stocks mentioned. RBC Capital Markets has investment banking ties to Andrew but none of the other firms mentioned have investment banking relationships with companies discussed in this piece.
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