Bring On the Bullishness for Telecom
By Cody Willard
03/05/2002 13:58
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My unfettered bullishness never results in a shortage of feedback. When I initially turned bullish back in late September, as the markets were collapsing and telecom equipment stocks such as Cisco CSCO and Tellabs TLAB were getting especially crushed, my inbox was filled with emails from naysayers. Over the past few weeks, when telecom stocks were again in the doldrums, my bullish posts on Columnist Conversation were, well, let's just say they were less than well-received.
Stocks have again ramped up with the Nasdaq's 8% rise in the last week and a half, and suddenly nobody hates me anymore. The real question, of course, is what to do now. Now that being bullish is no longer akin to being idiotic, what's an investor to do?
It's not such a hard question to answer -- and my reply will sound quite familiar to regular readers. In the immortal words of Bachman-Turner Overdrive, "You ain't seen nothin' yet!"
Where Opportunity Lies
The market has slaughtered telecom, and in their haste to abandon this sector, investors have given us some very nice opportunities. While there's nothing wrong with taking advantage of this huge run and locking in some (note the some ) profits, tremendous investment opportunities still exist in telecom. Lots of telecom companies remain oversold and undervalued. (I still can't quite believe that I'm able to put the words "telecom" and "undervalued" in the same sentence with a straight face.)
I still like the best incumbent local exchange carriers, or ILECs, SBC SBC and Verizon VZ , as the regulatory environment continues to swing in their direction. Both the House and Federal Communications Commission are playing with the rules in ways that will skew the playing field further in the ILECs' favor. There are also some real buys in the cable world, as the recent addition of a cable company to my Telecom Connection Portfolio reflects.
Now that every sell-side analyst on the planet has downgraded the wireless operators, now that they're down at newer, ever-lower levels, I'm doubling down on my homework and considering adding some of them. While I've still got serious reservations about access to capital and 2.5-to-third-generation transitions, these stocks are at least low enough to pique some valuation interest, AT&T Wireless AWE and Sprint-PCS PCS among the most interesting.
I'm certainly not growling at stocks of telecom equipment vendors, either, as good companies such as Comverse CMVT and Advanced Fibre AFCI continue to plug along. People are sick of me saying it, I know, but my conclusion remains: Operators across the board, particularly the ILECs, will spend more than they are currently projecting. Heck, next year they'll spend, dare I say, much more than they're currently projecting.
Capex Counting Problems
For example, the statement by Qwest's Q ever-accurate (kidding!) management that it might spend as little as $1.5 billion this year in capital expenditures is the most ridiculous of all the numbers. (Considering the source, go figure!)
There's simply no way that $1.5 billion can meet the heavy requirements of the FCC and state regulators for maintenance and reliability of its network. Meeting even lower-end growth figures of Qwest's network will simply increase that number further. My calculations put Qwest's minimum capex number closer to $3 billion.
We'll see sequential growth in wireline gross capex beginning in the third quarter of this year, as Verizon, SBC, BellSouth BLS and even Qwest resume normal spending patterns for their vast local and regional telecom networks.
While I can't complain about the money that my bullishness is making me, the worst part of seeing a bottom in capex numbers here is that those annoying endless bottom-callers of the world -- the managements at Corning GLW , Ciena CIEN , et al. -- will eventually be proved correct. I hate that. |
