Is AT&T entering some kind of new capital spending (capex) winter, just as summer’s getting started? That’s the current panic attack circulating through Wall Street.
The meme is circulating through some sell-side analysts, ostensibly fueled by the “Notter Note,” a report issed by Jefferies analyst George Notter and highlighted yesterday on Light Reading.
But traders and the market knew this already. Shares in stocks with heavy AT&T exposure, such as Ciena, have been weak for days. Ciena, for example, is down nearly 10% in the last week. In the pre-market this morning, Ciena was stabilizing. Ciena reports its results on Thursday.
This morning, more folks picked up on the news, including Michael Genovese of MKM Partners. “There looks to be a new widespread capital spending freeze in place at AT&T within the past ten days,” wrote Genovese in this AM’s note.
The talk is more than just rumor and innuendo, as Genovese points to MasTec (MTZ), which recently referred to the AT&T freeze on a conference call. Genovese speculates that it may be related to preparing for the AT&T/DirectTV (DTV) merger that is now in the works.
“We believe the current AT&T capex freeze will likely be measured in months not in quarters. If AT&T were buying another significant facilities-based telecom service provider, then the resulting spending freeze might have been significantly longer than what is likely in this case with DTV.”
Genovese expects that AT&T-DirectTV deal — if it gets government approval — to be a positive on capex over time, as the two companies have little infrastructure overlap and DirectTV has lots of cash flow.
But maybe there is more at work here? Infonetics analyst Michael Howard recently pointed out that network spending seems to be slowing across the board — possibly as service providers stall out as they figure out their Software Defined Networking (SDN) strategy.
AT&T, in fact, has already stated that SDN should help reduce capex over time. After all, that is the point of SDN.
So maybe the mysterious AT&T freeze could be a combination of these two. Think about it: If you are the head of AT&T networking technology and your company is about to undergo a major merger, just at the time that you’re pursuing a new wave of technology known as Domain 2.0, wouldn’t you sit back and re-evaluate? With a $21 billion capex budget, the ship can move a little more slowly.
If I had any of the networking stocks with major exposure to AT&T, I’d be a little nervous about this. Some of those companies include Ciena (CIEN), Alcatel-Lucent (ALU), Juniper (JNPR), Adtran (ADTN), and JDSU (JDSU).
[Disclosure: No positions in stocks mentioned at the time of writing.]