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The Need for Equipment: Providers Profit While Phone Companies, Cable Firms Duke It Out

Posted on: Monday, 27 March 2006, 03:03 CST

By Kathleen Gallagher, Milwaukee Journal Sentinel

Mar. 27--In the fierce competition between cable TV systems and phone companies, one group always wins: the equipment providers.

That's the attitude of one Wisconsin analyst in view of an increase in telecommunications spending after severalstagnant years.

"We'd rather be with some of the arms merchants -- the communications equipment vendors," said John Krause, senior equity analyst in the Appleton office of Thrivent Investment Management Inc.

U.S. telecommunications industry spending rose 8.9% in 2005 to an estimated $857 billion and is expected to climb another 10.2% this year, according to a report released in February the Telecommunications Industry Association. Those numbers put the U.S. telecommunications market "back on an upward path," and international markets are growing even faster, the report said.

Three key factors are driving the need for new equipment, Krause said:

-- Cable providers like Time Warner Inc. (TWX) and Viacom Inc. (VIA) are competing with regional Bell operating companies (RBOCs) like AT&T Inc. (T) and Verizon Communications Inc. (VZ) to retain customers, and that's pushing both groups to upgrade their equipment.

"If cable is going to offer voice, video and data, the RBOCs have to have the package as well," Krause said.

-- Both groups are looking for new sources of revenue growth, and more equipment can help them offer more services.

All of the companies have some kind of initiative to expand their broadband capabilities, for example.

Verizon is doing what it calls a "fiber to the premises" build that expands its cable connections. It has run fiber into 3 million homes since the initiative started in 2004, and Krause said he expects the company to pass another 3 million homes this year.

"They'll offer high-speed bandwidth -- video and music on demand, anything that can be fed over this fiber pipe -- because they're looking to get into the aggregation and distribution of the content," he said.

-- Cable providers and RBOCs are upgrading their equipment so they can lower their operating costs.

"A lot of this equipment will make it easier to run the plant with less labor," Krause said.

The desire of all these companies to offer a full range of services will drive them to buy equipment that not only transports the data, but also routes it.

Krause and his fellow investment professionals at Thrivent own the stock of several companies that they expect to benefit.

Tellabs Inc. (TLAB, $15.25), Naperville, Ill., makes, sells and services voice, data and video transport and network access systems. The company is a key vendor to Verizon's fiber-to-the-premises project.

Cisco Systems Inc. (CSCO, $21.30), San Jose, Calif., supplies data networking products for the Internet. The company in February closed on a $7 billion acquisition of Scientific-Atlanta Inc., a global provider of set-top boxes, end-to-end video distribution networks and video system integration. The deal is expected to help the world's largest supplier of data networking gear sell products that help change how TV is distributed and watched as more programming is directed to homes using the language of the Internet.

ECI Telecom Ltd. (ECIL, $11.16), Petah Tikva, Israel, designs, develops, manufactures, sells and services digital telecommunications and data transmission systems. The company has a heavy presence in European and emerging markets. It also sells more products to wireless carriers than the other companies.

Alcatel SA (ALA, $15.70), Paris, makes and sells telecommunications equipment and cables, and offers telecommunications services.

Alcatel's shares trade as an American Depositary Receipt, or ADR, on the New York Stock Exchange. Each Alcatel ADR that trades in the U.S. represents one Alcatel share that trades on the Paris Bourse. ADR holders are entitled to dividends and capital gains associated with the related shares that trade on the Bourse.

Alcatel shares jumped late last week on news that the company was in merger talks with Lucent Technologies Inc. The shares were up about 25% in the last 12 months, but Krause says he thinks there's room for more price appreciation.

Michael Quigley, Alcatel's president and chief operating officer, is providing a spark for streamlining the company's business and helping it focus on the right products, projects and divisions, Krause said. Yet, Alcatel shares are still selling at a cheaper valuation than the shares of many of its peers, he noted.

Alcatel's satellite equipment business is a drag on performance, but management has the ability to explore strategic options for that area, Krause said.

"These negatives are known, and people have already discounted them," he said.

Thrivent Investment Management owns Alcatel shares in its mid-cap stock, balanced and value funds.

Krause said he would buy Alcatel ADRs at current prices and said they could rise as high as $18 in the next 12 months.

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Copyright (c) 2006, Milwaukee Journal Sentinel

Distributed by Knight Ridder/Tribune Business News.

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NYSE:TWX, NYSE:VIA, NYSE:T, NYSE:VZ, NASDAQ-NMS:TLAB, NASDAQ-NMS:CSCO, NASDAQ-NMS:ECIL, NYSE:ALA, NYSE:LU,

Source: The Milwaukee Journal Sentinel

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