Jan 18, 2000--Telecom: Telecoms: Which Ones to Buy
Associate Editor: Len Hollie (1/18/00)
fnews.yahoo.com
What?s happening to the telecom juggernaut that is expected to transform the communications landscape?
The sector may be splintering, that?s what.
Data is king, and the old voice-oriented telecoms are being punished for having to spend enormous amounts of money to upgrade their systems while also being pressured to open their lines to competitors in exchange for permission to offer long distance service.
?A lot of investors own Baby Bell stocks, but we don?t expect that those companies will be the beneficiaries of the tech revolution,? says David Jordan, manager of the First Omaha Growth Fund. ?They are more like old line utilities and they will lose profits over the years,? he says.
Instead, Jordan says he favors more data-oriented companies such as Level 3 Communications (NASDAQ:LVLT - news) and Qwest Communications (NYSE:Q - news) which are competing with the telecom titans. They are a growing number of companies that are specializing in Internet Protocol (IP) technology, which allows voice, video and data signals to be sent over a single communications channel, which make networks more efficient and less expensive to run.
However, Jordan is now less enthused about Qwest now that it plans to buy U.S. West (NYSE:USW - news) . ?We believe that acquisition will slow down Qwest?s growth,? he says.
In fact, he doesn?t like any of the so-called Regional Bell Operating companies (RBOCs), also known as the Baby Bells. ?They are not as exciting,? he says. ?They have lines into the home, but they are being pressured to let competitors use those lines as they try to move into long distance.?
He is not alone. Some analysts also have qualms about the Baby Bells. In fact, last week, Merrill Lynch analyst Eric Strumingher downgraded three telecoms due to concerns about long distance voice revenue growth, among other factors.
Strumingher reduced his ratings on Baby Bells Bell Atlantic (NYSE:BEL - news) and SBC Communications (NYSE:SBC - news) as well as GTE Corp. (NYSE:GTE - news) to ?attractive? from ?buy.?
He notes in a report that growth drivers such as digital subscriber lines (DSL) and long distance service have taken longer than expected to kick-in. He also says that there are risks to these companies? earnings per share (EPS) estimates due to the additional spending and investment they have made in wireless technology because AT&T has upped the ante.
As a result, Strumingher says that Merrill is looking to reduce its exposure to the sector from a previously over-weighted position.
Strumingher now sees SBC?s 1999 earnings per share at $2.15, and 2000 at $2.27. His target price has been pared to $51 from $58.
He expects Bell Atlantic?s 1999 earnings to be $3.01 per share, and $3.20 in 2000. His target price was lowered to $66 from $75. GTE?s 1999 EPS is seen at $3.49, while 2000 is expected to be $3.85. The target price has been lowered to $79 per share from $86.
Of course, Bell Atlantic and GTE are currently trying to complete their merger.
?SBC is one of the better-positioned Baby Bells, and the company has been making acquisitions and lowering their infrastructure costs,? says First Omaha?s Jordan. ?But like the others, SBC still has more to lose by opening up their monopoly to competitors than they have to gain from getting into the long distance market where they have a number of very large competitors, such as MCI WorldCom (NASDAQ:WCOM - news) and AT&T (NYSE:T - news) .?
Those last two companies are among Strumingher?s favorites. Why? ?MCI WorldCom and AT&T are the large-cap service providers with the best strategies and asset bases to maximize this opportunity.?
WorldCom recently approached its 52-week low of $40.69, although it has since rebounded to the mid-$40s. The reason for its decline: Fears that a long-distance price war will eat into its growth.
There were also erroneous reports last week that the AOL-Time Warner merger would deprive the company of some valuable data traffic over its lines. The merger was seen removing AOL?s dial-up revenue from WorldCom because AOL would use Time Warner?s RoadRunner Internet service over a cable modem.
But analysts leapt to WorldCom?s defense this week, and debunked that notion.
Many noted that if AOL decides to use cable modems for delivery, then the Regional Bell Operating Company (RBOC) that supplies the dial-up lines for AOL would lose local traffic. But Worldcom, as a backbone supplier, would see a massive pick-up in demand due to the unlocking of the local bottleneck.
In addition, Strumingher says WCOM and Sprint (NYSE:FON - news) , which are planning to merge, offer the best return potential in the group this year, and says, ?nothing is even close.? He expects WorldCom to make a comeback when investors begin refocusing on the inherent growth potential of data transmission and the Internet.
Strumingher also says that both AT&T and Bell South (NYSE:BLS - news) appear attractive over the first half of this year because restructuring should enable these companies to accelerate growth in key businesses and cause a revaluation of the stocks.
Bottom Line:
Any telecom that is not moving with speed into the new tech frontier of data delivery should probably be moving out of your portfolio. |
