Merrill Lynch Warning on Wireline Stocks

Merrill Lynch analysts are warning investors against overvaluing traditional wireline companies, such as Lucent, Tellabs, Ciena, Alcatel and Adtran. In spite of new capital expenditures for initiatives like fiber, broadband, VoIP and 3G, ML feels that these companies are not yet good growth or value plays.

The reasons cited by the financial advisory firm include:

• In the aggregate, telco capex is flat and is expected to decline as a result of consolidation.
• Even though next-generation expenditures are rising, legacy equipment sales are declining, and those sales are still a much more important part of overall revenues.
• Wireline vendors are spreading themselves too thin by not spending enough on R&D.
• Carrier consolidation will eventually lead these companies to better financials, but they're not there yet. Operating margins are still negative-to-low.
• Analysts feel that wireless margins have already peaked and will not contribute as much in the upcoming period.
• Given the PE (Price:Earnings) and PEG (PE:Growth) ratios this sector is now trading at, ML does not feel that these companies are a compelling value.

AB -- 3/3/05