Telecom Equipment Providers in Focus

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The April-quarter results released by telecom-equipment provider Ciena (NASDAQ: CIEN) were impressive only when compared with its prior-year numbers. It lost $0.27 a share, while revenues jumped 6%. Nevertheless, management's guidance for third-quarter revenues in the $515 million to $545 million range, versus $508 million in the April quarter, propelled the shares to a solid double-digit gain. This showing encouraged investors like myself that the sector, one of last year's worst-performing, is, in fact, bouncing back nicely in 2013. A review of my February blog and March blog, each discussing telecom equipment and telecom firms, gives an idea of the background.

To get a feeling for whether the companies are in rebound mode, let's take a look at the telecom equipment market's most prominent participants.

First off, Cisco Systems (NASDAQ: CSCO) has started the year well, although sales gains have been driven largely by the acquisition of NDS. Steady earnings advances have persisted at the networking giant. Management cites margin expansion as one of the primary reasons behind its improved earnings tallies. Additionally, it mentioned a number of other factors that might support higher profits.

Specifically, it is well-positioned in fast-growing product markets, including cloud data center, as well as Service Provider product lines such as WiFi and Video. Innovation is still key to its profit expansion, with 10%-15% of revenues being invested in Research and Development. Moreover, order increases are being generated across numerous customer markets (Enterprise, Commercial, SP, and Public Sector, and key geographies including the U.S. and emerging regions, offset by challenges in Europe. Furthermore, Cisco has been returning cash to shareholders and enhancing the Information Technology model it offers to customers.

A look into a couple of the other major equipment suppliers should reveal favorable forecasts, as well, and share prices poised to climb further. Namely, QUALCOMM (NASDAQ: QCOM) for one, is on the leading edge of new mobile technologies, and its profits are on pace to soar this year as a result. The shares, however, appear to be reasonably valued.

QUALCOMM is a main beneficiary of the 3G and 4G transition, along with the proliferation of smartphones here and abroad. Equipment revenues are climbing at an exceptional rate, thanks to sales of data communications, networking products etc. Plus, its R&D budget dwarfs that of Cisco in proportion to sales at nearly 20%, investments that I think will serve it well. Spending is targeted at mobile computing technologies, and what it calls "the internet of everything," whereby it eventually intends to serve industries like auto, security and smart energy. Interestingly, GM, BMW and Audi will incorporate its LTE products in their fleets by 2015.

Rounding out the discussion, JDS Uniphase (NASDAQ: JDSU) stock gained on the Ciena news and could be a good choice for momentum-based investors, although the company has yet to see the rebound firsthand. JDS is likely to meet or surpass its June-quarter revenue outlook of $420 million to $440 million, up from $405 million in the March term.

JDS' customers are many of the biggest telecom service firms. Along these lines, spending trends are positive.

The company is broadening its customer base in telecom and data networking, while improving its product lines and developing applications for its commercial lasers, a category in which it specializes. Examples include home entertainment and PCs.

With segments composed of test and measurement products, commercial optical products, and security/performance products, JDS Uniphase is a broadband/mobile end-market supplier. This year's cyclical upturn ought to begin being noticeable in June-quarter results and as JDS Uniphase embarks on fiscal 2014 (years end in June).

In conclusion, telecom equipment and infrastructure companies are bouncing back. Those that have kept their distance based on the dismal 2012 performance may want to reconsider investments. Shares are mostly trading at below-average valuations in terms of price-to-earnings ratios and have not run up during 2013.

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Damon Churchwell has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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