Capex Continues Its Slow Drift Upwards

Following up on my most recent post on July 8th, I continue to see a slow but steady drifting upward of both telecom and networking capital spending.  An increasing competitive environment in the US wireless industry, the likely ramp of LTE spending in China in 2014 and the beginning signs of telecom spending bottoming in Europe should support service provider centric communications equipment stocks. In addition, while enterprise centric IT spending has not shown as vibrant of a recovery, recent results from distributors and other supply chain companies are starting to point to a recovery in enterprise networking spending.

Stocks that I have liked and continue to like in this current environment are Cisco, Alcatel-Lucent and JDSU.  While I continue to like all three of these names, I think the potential returns from current levels are not as significant as the respective returns over the past year. Specifically, I am looking for returns of 10%-20% over the next several months to year for both Cisco and JDSU, while ALU may have a bit more upside, yet with more risk as well.

Both Cisco and JDSU report earnings this week.  Wall Street is generally looking for Cisco to report results that are slightly better than consensus estimates, while there is a mixed view on JDSU going into its earnings.  The overwhelming consensus that Cisco will report a slightly better than expected quarter is a bit concerning as there seems to be little controversy going into results as compared to prior quarters. Thus, expectations are generally positive for Cisco, which leaves little room for any disappointment in their results. Even so, however, most signs seem to be positive for Cisco going into its results, including positive data points from its supply chain in 2Q results (e.g. distributors, contract manufacturers etc.), the continued strength in telecom capital spending in the routing area (as witnessed from both ALU and Juniper results) and a generally improving IT spending environment.  In addition, Cisco will be reporting its fourth fiscal report when it reports this week, which is generally a strong bookings quarter for Cisco.   This should support a solid year end backlog when results are reported.

With regard to JDSU, there is a mixed view going into their results, as most of its peers in the test and measurement business (e.g. Ixia, Spirent etc.) reported disappointing results.  On the other hand, optical component suppliers (e.g. Finisar, Alliance Fiber etc.) have generally reported (or pre-announced) positive earnings results.  Thus, there is more uncertainty around JDSU’s upcoming results and guidance.  My sense is if JDSU does offer either disappointing results and/or guidance, Wall Street will look at it as a buying opportunity as both these business segments are likely poised to improve in 2H13.

For my recent views on the security market post Cisco’s acquisition of Sourcefire, check out the following link.

Disclosures: I am currently long Alcatel-Lucent, Cisco and JDSU.  NT Advisors LLC may in the past, present or future solicit consulting business or have generated consulting business from any company mentioned in this post.