Beaten-Down Ericsson (ERIC) and Alcatel-Lucent (ALU) to Benefit from AT&T's Big Capex Move - Analyst

November 7, 2012 2:55 PM EST
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Analysts at Nomura commented on implications for the communication equipment sector following news AT&T (NYSE: T) announced capex targets of $22bn/year through 2015, 16-18% ahead of Street expectations.

The news will broadly benefit equipment vendors, analyst Stuart Jeffrey notes.

Ericsson (NASDAQ: ERIC) - "We believe Ericsson is one of AT&T’s biggest vendors. In addition to the potential revenue benefits, US gross margins are higher than group gross margins. We expect the company to benefit from the following:
- LTE coverage and capacity expansion.
- Small cell build-out, which Ericsson’s management at yesterday's capital markets day suggested would have an accretive gross margin profile.

Alcatel-Lucent (NYSE: ALU) - Alcatel-Lucent is the second of AT&T’s big suppliers; active in wireless and wireline. More than 10% Alcatel-Lucent’s revenues come from AT&T. Our analysis also shows US revenues have a higher gross margin profile from the group average.

We expect Alcatel to benefit from:
- AT&T’s broader 4G coverage plans
- Small cell build-out
- Ethernet backhaul, where Alcatel is the US leader
- Expansion of U-Verse, given Alcatel’s dominance of the US DSL market

Cisco (NASDAQ: CISCO) - The headline announcement implies Cisco is less likely to benefit due to AT&T’s focus on wireless over wireline. Cisco is a primary domain supplier for AT&T for IP/Ethernet/MPLS. We expect Cisco to benefit from:
- Routing, due to increase in wireless data traffic through the network.
- Minor laterals for Cisco related to new and expanded AT&T services offerings, such as business cloud services, which would require switching and security, and video conferencing (Tandberg).

Juniper Networks (NASDAQ: JNPR) -
- Juniper has no material presence in wireless backhaul, but its recently released ACX Access Router should help its exposure.
- Juniper should benefit from AT&T’s increased data traffic through the sales of core routers. Furthermore, like Cisco, Juniper should also benefit from SRX security sales.

Ciena (NASDAQ: CIEN) -
- While the headline announcement doesn’t point to Ciena directly, we believe AT&T’s capex announcement signifies that carrier investments may be close to bottoming. This helps sentiment on Ciena shares, since revenue growth and margin expansion was predicated on increased wireline investment by the carriers.

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