TAUB TALK: Why AT&T Will Rock the Wireless World TODAY
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editor: Steve Taub 11/22/99
AT&T (NYSE: T - Quotes, News, Boards) is about to stir up the wireless industry.
By the time the wheeling and dealing settles, shares of AT&T, Western Wireless (NASDAQ: WWCA - Quotes, News, Boards) and Lucent Technologies (NYSE: LU - Quotes, News, Boards) will all be much higher than they are today.
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That?s the message PaineWebber sent to clients early Monday morning.
As a result, shares of AT&T and Western jumped up at the opening on Monday. AT&T rose $2.88 to $49.63 while Western moved up $4.19 to $57.25.
However, PaineWebber?s analysts think these two stocks as well as Lucent?s, which is down on Monday, have a lot further to run.
Why?
Analyst Eric Strumingher thinks that AT&T will announce that it is creating a tracking stock for its wireless operations at its December 6 analyst meeting.
This would make AT&T Wireless more acquisitive. A likely target: Western Wireless, predicts PaineWebber analyst Walter Piecyk.
More wireless tracking stocks will mean more wireless capital spending. Good news for Lucent, says PaineWebber analyst Walter Piecyk.
Let?s start with AT&T.
Strumingher feels AT&T needs to jump-start its stock, which has been trading in the $40?s, down from the $60?s back in the spring.
So, he thinks the creation of a tracking stock will unlock the hidden value of AT&T Wireless. He thinks it is worth $60 billion, or $20 per pro forma share, figuring it would trade at 20 times 2000 cash flow (EDITDA), which he estimates will come in at about $3 billion. This year he expects AT&T Wireless EBITDA to top $1.8 billion.
As a contrast, Sprint PCS (NYSE: PCS - Quotes, News, Boards) has a market value of $36 billion. But Strumingher estimates its enterprise value of $45 ?despite having less than half of AT&T?s customers, a lower value per subscriber and expected EBITDA losses of $1.8 billion this year versus AT&T Wireless,? according to the analyst?s notes to clients.
Interestingly, Sprint PCS is down $3.60 to $89.84 on Monday.
Why would a tracking stock boost AT&T?
The wireless operation could invest without worrying whether it would hurt the overall company. It would be easier to attract employees. And it would make it easier for the wireless operation to make acquisitions.
Which brings us to Western Wireless. Analyst Piecyk thinks that if AT&T Wireless is on the hunt, a likely target would be Western.
Why?
AT&T Wireless?s cash flow margins have come under pressure and one main reason is because it must shell out roaming charges to rural-oriented companies like Western.
These roaming revenue, on the other hand, have helped to boost Western?s growth.
Piecyk?s projected value for Western: $100 a share, based on a 23 multiple on his 2001 cash flow estimate. Meantime, he?s raised his target price to $75 from $65.
Wow!
Which brings us to Lucent.
Basically, Piecyk thinks the telecom equipment company, which was spun off from AT&T earlier in the decade, believes that an independent AT&T Wireless would lift spending by an additional $1 billion, to $3 billion.
This would add $0.03 a share to his 2000 Lucent estimate or more than 200 basis points to his 2000 earnings per share growth rate.
?Earlier this year AT&T increased its capital spending to $2 billion from $1 billion, due to larger than expected usage and subscriber growth resulting from strong industry growth and its One Rate plan,? he notes in this morning?s notes.
He adds that Lucent is the primary beneficiary of increased capital spending by Western Wireless, enjoying a 60% share of Western?s expenditures.
His 12-month price target: $100, based on a multiple of 50 times his calendar 2000 estimate of $2 per share.
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