Downgrading Tellabs to Sell

Also: analysts' opinions on Cisco and MKS Instruments

Tellabs (TLAB ): Downgrades to 1 STAR (sell) from 3 STARS (hold)

Analyst: Ari Bensinger

S&P expects continued weak demand for Tellab's legacy digital cross connects. Product revenue from new Titan 6000 series is not nearly enough to offset the Titan 5500 drop-off. The Service division, whose revenue follows Titan demand, should begin to deteriorate in Q3. S&P projects 2001 gross margins at the mid 40s vs. 54% in 2000. S&P remains skeptical of Tellab's new product initiatives, as evidenced by the recent termination of a next-generation switching platform. S&P also sees a downside risk to its previously lowered $0.39 2001 estimate. With shares trading at 2.3 times 2002 sales estimate -- well above peers, S&P says sell.

MKS Instruments (MKSI ): Downgrades to 3 STARS (hold) from 4 STARS (accumulate)

Analyst: Robert Tortoriello

MKS warned that Q3 revenue will be $50-$55 million, 15% below the previous guidance. MKS expects a loss per share of $0.13-$0.18, vs. the previous $0.05-$0.13. Long-term, MKS should benefit from outsourcing among semiconductor capital equipment original equipment manufacturers and consolidation in the sub-assembly market, where MKS dominates. However, despite signs of a turnaround in semiconductor orders, fab capacity remains high and significant equipment purchases are unlikely until late 2002 or early 2003. S&P is lowering the 2002 estimate to a loss of $0.16, and sees MKS fairly valued at 2.5 times sales.

Cisco Systems (CSCO ): Maintains 3 STARS (hold)

Analyst: Megan Graham Hackett

Cisco announced a reorganization of operations into 11 technology groups, including Internet switching, core routing, optical and wireless. Before, the company organized around three target markets: enterprise, service providers and commercial. S&P views the new structure as yielding a more focused company, and thinks its a more appropriate approach given the service provider slowdown. The company reiterated that business had stabilized, and said orders so far in the quarter matched expectations. Visibility still is clouded, but with shares near their intrinsic value of $18-$22, based on S&P's discounted cash flow analysis, hold.

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