Investors hung up on telecom stocks in the second quarter, cutting off several Chicago-area companies in the process.
Networking equipment manufacturer Tellabs Inc.–long a glittering performer among local stocks–saw its share price plunge 52 percent amid the carnage, with shares ending the quarter at $19.38, down 75 percent from their all-time high in November 1999.
The Lisle-based company slashed its sales projection for the second quarter by about 40 percent and warned of losses of roughly 45 cents per share after one-time items.
“The dramatic changes affecting the landscape of the telecommunications marketplace have continued to impact Tellabs,” Chief Executive Richard Notebaert put it mildly in a statement about the coming quarterly results. “Service providers are temporarily able to meet increased customer demand for bandwidth by reallocating capacity within their networks and are only buying equipment to meet the immediate needs of their customers.”
That scenario has rippled throughout the telecom sector, dragging down carriers and equipment providers mercilessly. Share prices in the group attempted a rally early in the quarter, but formed a mini-bubble late last month as analysts grew gloomier about the forecast for a pickup in the economy.
Chicago-based Focal Communications Corp. shares gave up 75 percent to close the quarter at $2.36. The competitive local, long-distance and broadband carrier debuted in July 1999 at $13 and hit $85 less than nine months later.
The Nasdaq telecom index continued its prolonged slide, losing 5 percent in the quarter, to 311.18, pushing it down 75 percent from its all-time high of nearly 1250 in March 2000, before the tech bubble burst.
A few bright spots
Meanwhile, some local players bucked the trend. Anixter International Inc. gained 27 percent to end the quarter at $30.70, largely because the cable and wire communications products firm serves clients who are out of the volatile telecom sector.
And wireless equipment manufacturer Andrew Corp. of Orland Park gained 28 percent for the quarter, though it is down 45 percent in the last 12 months, tagged with the same overcapacity problems plaguing the entire group.
For Tellabs, the disappointing forecast led it to turn in the third-worst performance by a U.S. large-cap stock overall, measured by percentage loss.
To borrow a phrase from the always rosy real estate industry: Never been a better time to buy?
“There isn’t much you can grab onto that indicates a bottom” for the telecom sector, cautions John Miller, a credit analyst with John Nuveen Investments in Chicago, a big bond trading house.
Telecom corporate bond defaults have been rising fast, assets in the companies are far less than anticipated, the sector is overbuilt and regional carriers are spending less on capital investments, Miller noted.
A couple of rare positives, he said: Major carriers, including WorldCom and AT&T, have embarked on a strategy to boost cash, which should stabilize prices and help profits, and a few companies in the group–like Tellabs–are in a strong cash position with little debt.
Faith in Tellabs
At a recent Morningstar conference in Chicago, in fact, well-known value investor Bill Miller said he has been buying shares in Tellabs recently for his Legg Mason Value Trust mutual fund on the theory that the worst news on the stock is out or nearly out.
But telecom venture capitalist Cliff Higgerson isn’t so sure about a big comeback in the sector.
“The days of unlimited money like we just experienced will not return for another 15 years, if ever,” said Higgerson, partner in the venture capital firm ComVentures in Palo Alto, Calif. “Tellabs will come back, but I doubt if it will ever return to the percentage increases of the last 10 years. Still, I think Tellabs is a long-term survivor with steady management.”
In other sectors during the quarter, two spinoffs made their debut in mid-June.
Kraft Foods Inc. ended the quarter at $31–the same as its offering price–while FMC Technologies Inc. gained 3.2 percent, to close at $20.65.
Among other notable stocks, beleaguered Motorola Inc. logged its first up quarter since the 2000 first quarter, with shares gaining 16 percent, to $16.56. At that price, however, it is still down 45 percent for the last 12 months.
Among so-called old economy stocks, some of 2000’s best performers had mixed results. Household International shares gained another 12 percent to $66.70, up 60 percent for the 12 months, and Allstate added 5 percent, leaving it up nearly 98 percent in the past 12 months, but Walgreen dropped 15.5 percent in the quarter.
Chicago stock review
How the stocks of the 50 largest publicly traded companies in the Chicago area fared over the second quarter and past 12 months.
%% RANK COMPANY JUNE 29 3-MONTH 12-MONTH
CLOSE % CHANGE % CHANGE
1 Abbott Laboratories $48.00 +1.7% +7.7%
2 Kraft Foods 31.00 N.A. N.A.
3 Bank One 35.80 -1.0 +34.8
4 Motorola 16.56 +16.1 -45.4
5 Walgreen 34.46 -15.5 +7.0
6 McDonald’s 27.06 +1.9 -17.8
7 Allstate 43.99 +4.9 +97.7
8 Household International 66.70 +12.6 +60.5
9 Baxter International 50.50 +7.3 +43.6
10 Exelon 64.12 -2.3 +59.1
11 Illinois Tool Works 63.30 +11.4 +11.0
12 Sara Lee 18.94 -12.2 -1.9
13 Sears Roebuck 42.31 +20.0 +29.7
14 Northern Trust 62.50 0.0 -3.9
15 Quaker Oats 91.25 -6.0 +21.5
16 Tribune 40.01 -1.8 +14.3
17 Wm. Wrigley Jr. 46.85 -2.9 +16.8
18 Equity Office Prop. Trust 31.63 +13.0 +14.8
19 Aon 35.00 -1.4 +12.7
20 Tellabs 19.38 -52.4 -71.7
21 Equity Residen. Prop. Trust 56.55 +8.7 +23.0
22 CNA Financial 39.45 +12.7 +16.0
23 Molex 36.53 +3.5 -24.1
24 Telephone & Data Systems 108.75 +16.3 +8.4
25 Fortune Brands 38.36 +11.5 +66.3
26 NiSource 27.33 -12.2 +46.6
27 U.S. Cellular 57.65 -9.2 -8.5
28 W.W. Grainger 41.16 +21.6 +33.6
29 Smurfit-Stone Container 16.20 +21.7 +25.8
30 Heller Financial 40.00 +13.8 +95.1
31 ServiceMaster 12.00 +6.9 +5.5
32 R.R. Donnelley 29.70 +13.3 +31.6
33 Old Republic 29.00 +2.1 +75.8
34 CDW Computer Centers 39.71 +28.1 -36.5
35 Galileo International 32.50 +48.4 +55.8
36 Unitrin 38.40 +5.5 +30.7
37 DeVry 36.12 +20.2 +36.6
38 Alberto-Culver 42.04 +6.0 +37.6
39 First Health Group 24.12 +9.9 +47.0
40 FMC 68.56 -6.9 +18.1
41 Pactiv 13.40 +10.6 +70.3
42 Brunswick 24.03 +22.4 +45.1
43 Arthur J. Gallagher 26.00 -6.1 +23.8
44 General Growth Properties 39.36 +12.6 +23.8
45 Tootsie Roll Industries 38.54 -16.5 +13.4
46 GATX 40.10 -5.6 +17.8
47 UAL 35.15 +6.3 -39.6
48 Nicor 38.98 +4.6 +19.4
49 John Nuveen 56.65 +4.9 +35.1
50 Navistar 28.13 +23.4 -9.4
Source: Bridge
%%
