I continue to be positive on large telecom equipment suppliers Ericsson and Alcatel-Lucent. The main premise behind my positive view is the telecom infrastructure industry is a cyclical industry, and we are likely to see a recovery of capital spending by telecom operators in 2013. This recovery in telecom spending, combined with relatively low valuations for equipment companies like Ericsson and Alcatel-Lucent, should allow these stocks to have good relative performance in 1H 2013.
In addition to this primary thesis on these stocks, I also point to two other recent data points. First, the strong recent operating results and profits by the telecom equipment infrastructure business at Nokia Siemens Networks (NSN). As mentioned on a prior blog post, NSN has reported better than expected profit margins in the past three quarters and seems to be executing well on its restructuring plan. Secondly, I believe the momentum of Chinese based equipment suppliers Huawei and ZTE is diminishing (at least for now), which should bode well for Alcatel-Lucent, Ericsson and others. This is an important point as Huawei and ZTE have been massive market share gainers and price setters in the telecom infrastructure market over the past decade, which negatively impacted the entire sector.
Both Huawei and ZTE provided financial updates on their 2012 results in the past couple of weeks, which showed slowing momentum in terms of further market share gains and achieving their respective 2012 revenue targets. According to the Financial Times, Huawei announced in January revenues of about $35 billion for 2012, but that was below the Huawei target of $38.7 billion it was discussing as late as September of 2012. Over the past couple of years, Huawei has been seeking to achieve its long-term growth targets by entering the new markets of Enterprise Networking and Mobile Devices. While the company seems to be doing well in Mobile Devices at the low end of the market, Huawei does not seem to be hitting its targets in the Enterprise Networking market. These new efforts are also spreading the company thin in my view and puts Huawei on a multi-front competitive battle with Cisco and HP in enterprise networking, Samsung in mobile devices in addition to traditional competitors like Alcatel-Lucent, Ericsson and NSN in telecom infrastructure.
As for ZTE, the company pre-announced lower than expected results for 4Q12 last week. Not only were the results lower than expected, but also some equity research analysts now believe ZTE’s market share gains in the international telecom equipment market have stalled. Below is an exert from a research report on this topic from UBS Investment Research:
“After large-scale staff layoffs and the closure of a few representative offices in
overseas markets, we believe ZTE’s growth in the overseas equipment segment
will slow significantly. Our channel checks suggest the pipeline for new
contracts is limited. In the longer term, we believe ZTE’s withdrawal from some
developed markets means the prospect of ZTE gaining a top-three role as a
global equipment vendor by overtaking Nokia Siemens Networks (NSN) and
Alcatel-Lucent has become quite slim.”
Source: UBS Investment Research Report Dated 1/28/13
Disclosure: I currently own shares of Alcatel-Lucent, Ericsson, HP and Cisco all of which are mentioned in this report. I also may solicit any company mentioned in this report as a potential consulting client for NT Advisors LLC.