For those of us interested in international carriers and CLECs
Telecom stocks rally on Monday
Influential analyst Grubman issues defense of industry
By Jeffry Bartash, CBS MarketWatch
Last Update: 5:28 PM ET Apr 17, 2000 NewsWatch
WASHINGTON (CBS.MW) -- Telecommunications stocks struggled most of Monday to recover from last week's drubbing, but the sector came roaring back to life at the close of the trading session to end with a solid gain.
The American Stock Exchange's Networking index jumped 6.8 percent, led by Cisco Systems (CSCO: news, msgs), whose stock climbed 9 1/2 to 66 1/2. The Amex index is composed mostly of mature networking concerns such as Cisco and Lucent Technologies (LU: news, msgs).
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The Nasdaq's Telecommunications index, composed of younger growth companies whose soaring appreciations helped to propel the Nasdaq to a record high two months ago, averted a sixth straight decline. Though down most of the day, it closed up 6.2 percent. The index lost 27 percent of its value last week alone.
While many market gurus believe the high-tech companies driving the Nasdaq were wildly overvalued -- by traditional stock measure standards they were -- the telecom concerns are different from their brethren, namely the ".com" businesses.
Unlike many ".coms", most of the high-flying telecom companies have strong sales growth. A lesser but still large number also are making profits now or aren't that far away from doing so. And looking ahead, analysts see bulging sales for as far as the eye can see as carriers race to offer new, lucrative high-speed services and equipment makers hustle to build the gear to underpin the networks of the Internet Age.
For those and other reasons, Jack Grubman of Salomon Smith Barney -- considered by some the most powerful and perhaps smartest telecom analyst on Wall Street -- reiterated his "buy" ratings Monday on emerging independent local phone carriers and broadband suppliers.
"Despite current market conditions, we reiterate that secular trends in the telecom industry remains strong," Grubman said in a lengthy defense of the sector to investors. "Well-run companies in all categories should create a ton of value for shareholders and we would be taking advantage of current stock prices to buy the best names in each segment of the telecom industry."
Grubman, who also performs rare double duty as an investment banker to drum up business for his firm, argues that the Nasdaq's big case of indigestion last week doesn't alter the strong underlying growth prospects of the telecom industry.
Because of the large demand for their products and services, telecom concerns have been able to raise gobs of money and face little prospect of a cash crunch, a danger now threatening once-popular ".coms" such as Drkoop.com (KOOP: news, msgs). In addition, telecom companies are better managed than in the past and possess increasingly valuable assets that will eventually make them attractive candidates for takeover, Grubman said.
Among telecom carriers, Grubman likes the "clecs", or competitive local exchange carriers, which offer local and high-speed services in competition to the Baby Bells; and the high-speed national network operators such as Williams Communications (WCG: news, msgs), Level 3 Communications (LVLT: news, msgs) and Global Crossing (GBLX: news, msgs).
Those two sectors have suffered excessively in the latest market retreat, but they retain the highest growth prospects, he said.
At the same time, Grubman asserts that's it's OK to hold shares in some of the older carriers too. Like other industry observers, he believes a handful of global carriers will emerge, most likely from among today's giants. Only they appear to have the resources to rapidly snap up the assets they need to become all-purpose suppliers of telecommunications services.
"It is not mutually exclusive to own the high-quality new guys and to own the so-called 'old' guys who happen to be evolving into global providers of telecom services, especially the providers to large corporate users," he said in his report.
In short, Grubman seems to argue that overwhelming business and consumer appetite for bandwidth -- high-speed data and Internet connections -- will continue to drive demand and insulate the telecom sector.
While the logic of his argument is sound, investors should consider two things. The first, obviously enough, is that not all clecs or broadband suppliers are going to be winners. Picking exactly who they are is a big challenge. And the clear favorites, MacCleodUSA (MCLD: news, msgs), Allegiance Telecom (ALGX: news, msgs), Nextlink Communications (NXLK: news, msgs), remain highly valued relative to their peers, if not by traditional standards of measurement.
The second thing to consider is that already-intense competition is only going to build, eventually putting pressure on prices and hence profits of clecs and broadband suppliers. For now, though, that's not a concern.
In any event, the telecom sector remains a strong bet to play, perhaps the strongest bet in the whole stock market, particular as investors seek out more value and less hype. A new industry is being built, and these are companies laying the fibers or wireless infrastructure, installing the switches, tying together the high-speed networks and delivering the lucrative new services to customers.
* * *
Emerging independent multinational carriers such as Primus Telecommunications (PRTL: news, msgs), Viatel (VYTL: news, msgs) and Telscape International (TSCP: news, msgs) are among the favorites of Vik Grover, a communications analyst at Kaufman Brothers.
In the wake of the Nasdaq's retreat, those carriers are at historically low valuations, Grover said. Yet each has strong network assets, large customer bases, surging sales and experienced executives. All three are likely to be acquired, Grover said.
Primus, for its part, jumped 5 to 30 1/2. Yet Viatel lost 3 15/16 to 28 7/8, a 12 percent drop. Telscape slipped 7/8 to 11 1/4.
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