Morgan Stanley downgrades Tellabs stock on potential for customer AT&T to buy from rival Cisco

Tellabs investors fear AT&T will buy from rivals

SAN FRANCISCO — Shares of Tellabs Inc. slipped Tuesday after Morgan Stanley analysts downgraded the stock on projections that one of Tellabs’ major customers, AT&T Inc., will soon start buying cheaper routers from rivals.

THE SPARK: Morgan Stanley analysts wrote in a note to clients that they expect that AT&T is planning a “relatively quick transition” away from a high-margin type of Tellabs router and toward cheaper routers from Cisco Systems Inc. and others. The analysts estimate that AT&T currently accounts for 40 percent of Tellabs’ sales of broadband-data networking equipment. They downgraded the stock to “Equal-weight” from “Overweight.”

THE BIG PICTURE: The analysts wrote that while AT&T has been beefing up its purchases from Tellabs to build out its capacity in response to the surge in mobile Internet traffic from the iPhone, that momentum is expected to slow as AT&T moves aggressively to less expensive options.

THE ANALYSIS: Tellabs has “enjoyed a perfect storm in its product mix, but as high-margin broadband data products come under pressure in 2011, we expect a revenue decline and gross margin pressure to lead to lower earnings per share in 2011,” the analysts wrote.

SHARE ACTION: Tellabs shares fell 7 percent, or 48 cents, to $6.33.