Recent earnings reports, public comments by company management teams and new spending catalysts in China for 2H13 suggest to me that communications equipment companies exposed to telecom service providers, especially in the US, should report good 2Q results and the stocks should react favorably to these results. Telecom equipment stocks are very cyclical and I believe solid 2Q earnings results and the potential for new spending catalysts in China as that country builds out 4G LTE networks in 2H13 and 2014 and in the US as Sprint and T-Mobile are likely to increase spending to catch up with Verizon and AT&T in LTE coverage create a framework for communications equipment stocks to go higher as they report 2Q earnings. I view Alcatel-Lucent (ALU), Cisco (NASDAQ:CSCO), Ericsson (NASDAQ:ERIC), JDS Uniphase (JDSU) among others as good ways to play this theme.
Here are some recent data points that form the basis of my view that communications equipment stocks with exposure to the telecom service provider spending should perform well into 2Q earnings season.
Cisco's Service Provider Bookings Growth - While Cisco reported an overall strong April quarter when it announced earnings on May 15th, the customer segment with the best overall bookings growth was the Service Provider segment. Service Provider bookings grow 8%, compared to the overall corporate average growth of 4%. The 8% growth in bookings was a material acceleration from the -1% growth that Cisco reported in their January 2013 quarter and reflective of the improving order trend in service provider market. This was most evident in the US where orders in the US service provider market grew 10% year over year vs. a flat year over year performance in the January quarter. AT&T is typically Cisco's largest US service provider customer. The strong acceleration in Cisco's overall US service provider orders in 2Q was likely driven by strong spending recovery in AT&T.
Juniper CEO Comments on Better Linearity - On June 5th, the CEO of Juniper spoke at an investor conference and stated that service provider order linearity through the first two months of the June quarter was tracking ahead of normal historical patterns. This data point late in the current June quarter was very important as it provided a fresh view on order trends in the service provider market. Verizon and AT&T are typically the company's largest service provider customers, and better than normal order linearity in the overall service provider market is likely indicative of the US service provider market being healthier in 2Q vs. 1Q for Juniper.
Ciena Earnings Report - On June 6th, Ciena reported better than expected results for 2Q13 and in particular showed strong year over year growth in the US of 14%. The 14% growth was an acceleration of the -1% growth in 4Q12 and the 13% growth in 1Q13. A review of Ciena's 10Q filed on June 12th also showed that sales to AT&T grew 41% year over year in 2Q13. Like Cisco, AT&T is Ciena's largest US service provider customer and the 41% growth in sales in 2Q13 for Ciena likely suggests that other telecommunications equipment suppliers with exposure to AT&T and the US should report good 2Q results.
In summary, the strong linearity comments by Juniper and the solid bookings and sales growth in the Service Provider segment from Ciena and Cisco suggest that communications equipment providers should fair well when they report 2Q results. Those with exposure to the US and in particular AT&T should do particularly well. The stocks I think could benefit from this theme given their exposure to the telecommunications service provider market, and in particular the US market, are Alcatel-Lucent, Cisco, Ericsson and JDS Uniphase.
Adding to the fairly solid spending trends in the US is the potential beginning spending in China for 4G LTE build-outs in 2H13. In particular, China Mobile officially issued its LTE tender last week for over 200,000 LTE base stations. This build-out is expected to begin later in 2013. While this build-out is likely to primarily benefit the Chinese based equipment suppliers Huawei and ZTE, there should be some benefit to western communication equipment suppliers as well, with Alcatel-Lucent and Ericsson likely benefiting from the rollout of 4G in China. Finally, the dynamics for the US spending environment should remain positive going into 2014 as both Sprint and T-Mobile seek to invest more aggressively to challenge the competitive position of both AT&T and Verizon in the US wireless market.
Thus, the potential of good 2Q results by telecommunications equipment providers driven by a strong US service provider market, China beginning its LTE spend later in 2013 and the prospects of Sprint and T-Mobile to invest more aggressively to challenge the position of AT&T and Verizon in the US wireless market should form a positive backdrop for communication equipment stocks exposed to the service provider markets.
Disclosure: I am long CSCO, ERIC, JDSU, ALU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: NT Advisors LLC is a consulting firm that may solicit any company mentioned in this post for consulting services in the past, present or future.