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Street Talk: Foundry cools
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December 20, 2000: 10:09 a.m. ET
Analysts punish Cisco, other networking companies, on spending concerns
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NEW YORK (CNNfn) - Analysts punished networking companies Wednesday after a warning by one of the sector's biggest names cited concerns that customer spending will be slowing down.
Merrill Lynch cut its intermediate-term rating on Foundry Networks (FDRY: Research, Estimates) to "neutral" from "accumulate" after the maker of Internet networking products said it expects to report fourth-quarter earnings below analysts' expectations, citing a recent shift in spending on communications infrastructure.
Merrill also cut its 2000 earnings-per-share estimate to 69 cents from 80 cents and its 2001 estimate to 83 cents from $1.15.
"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," Merrill said in a research note.
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Robertson Stephens cut Foundry to "market perform" from "buy," cut its 2000 earnings estimate to 71 cents from 81 cents and its 2001 estimate to 45 cents from $1.15.
ABN Amro cut its rating on Foundry to "hold" from "buy." It cut its fourth-quarter earnings estimate to 13 cents from 25 cents, its 2000 estimate to 68 cents from 80 cents, its 2001 estimate to 85 cents from $1.14 and its 2002 estimate to $1.05 from $1.56.
SG Cowen cut its rating on Foundry to "neutral" from "buy" and cut another networking company, Extreme Networks, to "neutral" from "buy."
Cisco Systems
Merrill Lynch cut its intermediate-term rating on computer networking parts maker Cisco Systems (CSCO: Research, Estimates) to "accumulate" from "buy" on concerns about service provider capital spending and a slowdown in corporate technology spending.
Merrill said it was not adjusting its earnings for the company, but said "the upside in our estimates may be limited."
"Foundry's pre-announcement represents the first acknowledgment that capital spending issues are also impacting suppliers of next-generation switching solutions," Merrill said in a research note. "We estimate that next-generation switching solutions represent about 20 percent of Cisco's revenues."
Hewlett-Packard
Merrill Lynch cut its near-term rating on computer maker Hewlett-Packard (HWP: Research, Estimates) to "neutral" from "accumulate." Merrill cited "fundamental risks, [a] slowing information-technology environment and poor Unix orders."
"A rough estimate from our valuation work suggests a $40 valuation for Hewlett-Packard," Merrill said in a research note.
Merrill said it sees "more risk of another disappointment from Hewlett-Packard."
The company's shares closed Tuesday at $31.31.
IBM
Merrill Lynch downgraded the world's largest computer company, International Business Machines (IBM: Research, Estimates), to "neutral" from "accumulate."
Merrill cut its 2001 earnings estimate to $4.87 a share from $4.93 on a slowdown in technology spending and long-term fundamental issues, which Merrill said may put second-quarter and 2001 revenue and earnings "at risk."
IBM shares closed Tuesday at $90.13.
Micron Technology
Merrill Lynch cut its price target on shares of computer memory maker Micron Technology (MU: Research, Estimates), citing oversupply of and lagging demand for memory chips.
The price target was cut to $70 from $120. The cut comes as Micron prepares to report its November quarter results after the market closes Wednesday, Merrill said.
Micron Technology shares closed Tuesday at $34.75.
Linear Technology
Credit Suisse First Boston cut its 2001 and 2002 earnings estimates for chip and circuit maker Linear Technology (LLTC: Research, Estimates) and downgraded its rating on Linear's stock to "buy" from "strong buy."
CSFB lowered its 12-month target for the company's stock to $65 from $74.
CSFB cut its 2001 earnings-per-share target for Linear to $1.30 from $1.38 and its 2002 estimate to $1.49 from $1.66.
Citing a slowdown in "new economy" and "old economy" companies, CSFB said the semiconductor and analog industry would be hit by the downturn.
CSFB said it believed Linear would still meet its consensus estimate of 33 cents per share for the fourth quarter, but it revised its revenue estimate to $251.1 million from $253.5 million.
Jabil Circuit
SG Cowen cut its rating on Jabil Circuit (JBL: Research, Estimates) to "neutral" from "buy" after the contract electronics manufacturer blamed parts shortages for fiscal first-quarter earnings that fell short of expectations and lowered its full-year forecasts due to slowing demand for personal computers.
Goldman Sachs removed Jabil Circuit from its "recommended for purchase" list and cut its 2001 earnings estimate to $1 from $1.15 and its 2002 estimate to $1.31 from $1.50.
Merrill Lynch cut its fiscal second-quarter earnings estimate to 20 cents a share from 28 cents and its 2001 estimate to 96 cents from $1.15.
VerticalNet
W.R. Hambrecht analyst Derek Brown downgraded VerticalNet (VERT: Research, Estimates) shares to "buy" from "strong buy" after Converge -- an online marketplace founded by Hewlett-Packard (HWP: Research, Estimates) and 14 other technology companies -- said Tuesday it would buy NECX, an electronic components trading exchange owned by Internet marketplace owner VerticalNet.
"While several potential positives may arise from this deal, we believe near- and medium-term risks and uncertainties surrounding the VerticalNet 'story' merit continued caution from investors," Brown wrote in a research note.
Safeway
Merrill Lynch said supermarket chain Safeway (SWY: Research, Estimates) is the most consistent defensive growth food retailer, even in volatile markets.
It said Safeway's organic growth in the past eight years has been better than twice industry averages and its current comparable-store sales growth is about 4 percent, still better than twice the industry average.
"With sustainable high-teens earnings-per-share growth, no matter what the cycle, we think a market multiple significantly undervalues this excellent retailer," Merrill Lynch said in a research note.
Its acquisitions of Vons, Dominick's Supermarkets, Carr-Gottstein Foods and Randalls Food Markets have all been accretive, and the recent acquisition of Genuardi's Family Markets looks equally attractive, Merrill Lynch said.
Safeway shares closed Tuesday at $58.50.
Countrywide Credit
ABN Amro cut its investment rating for Countrywide Credit Industries (CCR: Research, Estimates) to "add" from "buy."
ABN Amro kept its 2001 earnings estimate at $3.12 a share on Countrywide and was reducing its 2002 estimate to $3.65 a share from $3.80.
"Our 2002 estimate reduction reflects a more conservative posture on origination margins and is still well above [the] current consensus [estimate] of $3.52," ABN Amro said in a research report.
Countrywide shares closed Tuesday at $48.63.
Merrill Lynch
Prudential Securities analyst Eva Radtke started coverage of Merrill (MER: Research, Estimates), the world's largest stockbroker, with an "accumulate" rating and a 12-month price target of $75.
Radtke said she believes Merrill Lynch is well-positioned to achieve double-digit earnings growth and said her earnings-per-share targets for fiscal 2000 and 2001 are $4.08 and $4.11, respectively.
"The diversity of Merrill Lynch's business lines and the expanding proportion of recurring fee revenue, particularly from fee-based client accounts, adds stability to its revenue stream in the face of market fluctuations," Radtke said in a research note.
 She said Merrill has undertaken an aggressive margin-expansion program to enhance overall profitability and operating leverage, and she expects to see the firm shed some of its underperforming, non-core businesses as part of the effort.
In addition, Radtke said the U.S. Federal Reserve's "bias to ease interest rates could serve as a near-term catalyst, particularly if an interest rate cut stabilizes the markets and results in a more amenable underwriting environment."
Shares of Merrill closed Tuesday at $63.88.
-- from staff and wire reports 
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