Print

Mail

wiki links

Phone-equipment stock may decline

Investors tempted to buy into the recent rally in European phone-equipment stocks should think again. Bank shares might be a better bargain after this week's interest-rate cuts, fund managers said.

Alcatel SA and other phone-equipment makers have surged since Sept. 21, when stock markets in the UK, Germany, Italy and Switzerland hit four-year lows, amid expectations rate cuts in Europe and the US will spark an economic rebound next year. Even with a recovery, those gains may be too optimistic given the outlook for profit, according to investors.

"Earnings are going to be dreadful" for phone-equipment companies, said Richard Lewis, who helps manage US$1 billion in European equities at New Star Asset Management in London. "If you really want to play the economic upturn, you should be buying banks."

He holds Nordea AB and UBS AG. UBS, BNP Paribas SA and other financial companies are more likely to benefit as falling interest rates boost lending activity and reduce the risk of bad loans, investors say.

The Dow Jones Stoxx 600 Index this week rose 3.9 percent, its fifth weekly gain in seven, after the US Federal Reserve, the European Central Bank and the Bank of England cut borrowing costs as a US slowdown threatens to drag Europe into recession.

"Those looking for exposure to economic recovery through next year might well find greater value in financials" than in phone-equipment shares as rates decline, said George Hodgson, Theodore Varelas and Helen Roughsedge, strategists at ABN Amro Holding NV, in a note e-mailed to investors.

Siemens AG, which had 9 percent of the market for wireless equipment in 2000, and Nokia Oyj, which got about a quarter of last year's sales from phone equipment, are among the Dow Jones Stoxx 50 Index's most expensive shares, each changing hands for more than 36 times forecast profit, according to Bloomberg data.

UBS and BNP trade for less than 17 times projected earnings, and the average stock in the index changes hands at 19 times.

Siemens, GN Store Nord A/S, a Danish phone-equipment maker, and Ericsson AB, the No. 1 manufacturer of mobile-phone networks, paced this week's gains, advancing 9 percent or more.

The phone and technology groups were the best performers among the 18 Stoxx industry groups, gaining 8 percent or more.

Siemens, Alcatel, Ericsson, Nokia and Royal Philips Electronics NV have swelled the Stoxx 50's market value by 95 billion euros (US$85 billion) since Sept. 21, equivalent to 14 percent of the index's total advance in that span.

"We're beginning to see valuations that imply a serious recovery and that the worst is behind us," said Sophie Blanpain, an international equities strategist at Morley Fund Management in London.

"We don't think that will happen at all."

European phone-equipment companies haven't done enough to cut capacity to offset the impact of falling sales on earnings, she said.

While Ericsson and its European rivals may reduce their cost base by as much as 15 percent by the end of 2002, that's less than the 25 percent expected from their US counterparts, according to Goldman, Sachs & Co.

European phone-equipment stocks will come under even more pressure if an expected sales rebound doesn't materialize next year, strategists say.

Goldman expects revenue in the industry to fall by "about" 10 percent in 2002, compared with the consensus analyst forecast for 4 percent growth, said Ali Nokhasteh, a strategist at the US securities firm.

"We have no doubt there will be an economic recovery, but we may need to take more pain before we get there," said Pieter Spierings, who helps manage 7 billion euros at Kempen & Co. in Amsterdam.

"We don't think this rally (in phone-related stocks) can last."

Spierings has been selling phone shares and buying bank stocks such as UBS and Deutsche Bank AG.

While interest-rate cuts typically boost phone-equipment stocks because they increase the present value of companies' future profit streams, recent share-price gains already take those reductions into account, said Nokhasteh.

ABN Amro and other banks have dropped this year as economic weakness raised concern their customers will struggle to repay debts. Those concerns will probably lessen if rate cuts spark a recovery, investors say.
This story has been viewed 1979 times.