Wall Street Beat: Cisco forecast weighs on sector

The Nasdaq went through another week of tumult as a weak Cisco forecast affected telecom and networking supplier shares.

A weak forecast from Cisco marked another roller coaster week for technology companies on the stock market.

The Nasdaq, home to many tech companies, suffered a gut-wrenching 3.1 percent drop Tuesday after a US service sector report showed a decline in the nonmanufacturing index from December to January. Though the index recovered somewhat during the rest of the week, the Tuesday drop was yet another demonstration that IT investors are worried that a broad economic slowdown will affect technology. The decline in the nonmanufacturing sector was the first such drop since the beginning of 2003.

Cisco's earnings report on Wednesday reinforced concerns that the broader economy will have an impact on IT. Cisco forecast revenue for its current fiscal quarter to increase 10 percent, compared to analyst consensus expectations of 15 percent, according to Thomson Financial. On a conference call with analysts, CEO John Chambers said the upcoming quarters will be "extremely challenging."

Confirming fears of market watchers, he also noted that "we are seeing our US and European customers becoming increasingly cautious."

However, sales for the fiscal quarter ending January 26 were up by 16.5 percent to US$9.8 billion. The company has been saying for some time that it will sustain double-digit growth through the rest of the decade by incorporating data, voice, video and mobile capabilities -- its "quadruple play" -- across product lines.

Despite the muted forecast, market watchers still have faith in the company. Company shares rose slightly the day after the report, closing at US$23.38, up by $0.30.

The quadruple play pitch still resonates with analysts, and several company watchers noted that Cisco shares have declined along with the wider market over the last few months, giving it a good valuation for long-term investors. Pacific Crest analyst Tim Daubenspeck upgraded the stock to "Outperform" from "Sector Perform."

"Ultimately, we believe that many of the drivers are firmly in place for Cisco to achieve its long-term growth forecast of 12 percent to 17 percent," he said in a research note.

Chambers' cautious forecast, however, could have a bad effect on its suppliers and customers, including electronics manufacturing services and telecom companies. On Thursday, Qwest Communications dropped $0.29 to close at US$5.27, Sprint Nextel declined by $0.6 to close at US$9.56, and Nortel Networks dropped $0.55 to US$10.99.

In other telecom-sector news, Alcatel-Lucent on Friday said revenue for its fourth quarter increased 18 percent to US$7.61 billion. The company, however, suffered a net loss of US$3.76 billion, mainly because of a writedown related to the shrinking value of assets from Lucent. Company shares declined by $0.29 to US$5.96 in midafternoon trading.

Citigroup Global Equity Research said that the Cisco forecast does not bode well for electronics manufacturing suppliers. "Simply put this is not good news for EMS [electronics manufacturing services] companies," wrote Citigroup's Jim Suva in a research note.

Such companies include Jabil Circuit, Celestica and Smart Modular Technologies, he noted.

In other technology sectors, Time Warner's plans to split up the Internet access and audience businesses of its AOL unit, reiterated by CEO Jeff Bewkes Wednesday, gave a temporary boost to Time Warner shares. Time Warner wants to grow AOL's ad-supported audience business, including online services and content.

The company had said before that it would at some point run the two businesses as separate entities, to better focus on the advertising business. Nevertheless, company shares rose $0.31 Wednesday to close at US$15.71.

But the company has an uphill battle. In the fourth quarter, AOL's ad revenue increased 18 percent, less than the 25 percent industry average. And it faces not only Google, but a potentially strengthened Microsoft, if its bid to buy Yahoo succeeds.

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