With economically sensitive stocks in vogue, defensive issues like the Baby Bells are out of favor. That could present a buying opportunity in BellSouth, SBC Communications and Verizon Communications, the three big Bells.
The trio are close to their 52-week lows and now trade for around 16 times projected 2002 profits, an appreciable discount to the S&P, which fetches 23 times estimated 2002 profits. All three stocks are back where they stood in 1998 despite markedly higher profits. They also pay reasonably high dividends in a yield-parched environment. Verizon has a dividend yield of 3.2%; SBC, 2.7%; and BellSouth, 2%.
SBC, at 37.33, is down over 20% this year and trades for 16 times estimated 2002 profits of $2.34 a share. BellSouth, at 38, also has a 2002 multiple of 16, based on projected earnings of $2.41 a share. Verizon, at 48, trades for 15 times estimated 2002 earnings of $3.25 a share.
These estimates, from Morgan Stanley analyst Simon Flannery, don't factor in the boost that the Bells will get from the end to goodwill amortization, which could lift SBC's profits by 12 cents a share, BellSouth's earnings by 16 cents, and Verizon's net income by over 30 cents. A bullish Flannery has a price target of around 55 for both SBC and BellSouth and 70 for Verizon.
The knock on the Bells is that profit growth in 2001 and in the coming years is apt to be less than the roughly 10% annual gain targeted until this year. BellSouth, for instance, sees 4%-6% earnings growth next year. SBC may have minimal growth in profits in 2002. The Bells don't stack up so well against the many companies that are expected to experience big earnings rebounds next year.
The Bells are being pressured by flat-to-declining revenue in their core telephone business as many residential customers remove second phone lines in favor of cellular plans or access to the Internet over cable lines. Data traffic growth is slowing and the Bells' big wireless operations are maturing.
Flannery argues that these issues already are discounted in the Bells' stock prices. In response to lower profit growth, the Bells are cutting back on capital expenditures, which will boost cash flow and lift returns. Competition is diminishing, meanwhile, with the collapse of so many competitive local exchange providers.
"These are extremely profitable companies with strong balance sheets," Flannery says, "The risk-reward looks favorable." |
