Analyst Actions
Goldman Whacks Telecom Sector With Downgrades
By Dan Bernstein
Staff Reporter
7/11/01 11:08 AM ET
URL: thestreet.com
(Updated from 10:56 a.m. ET)
At least Frank Governali isn't making too many excuses.
In a research note this morning, the Goldman Sachs analyst rightfully admitted that the massive onslaught of downgrades and estimate revisions that he and his staff unleashed on the telecom sector this morning would perhaps have been more appropriate 12 or 18 months ago. But, as he put it, "midyear is a good time to consider the outlook for the remainder of the year, as well as the prospects for the new year."
The outlook doesn't seem too good. Governali downgraded WorldCom(WCOM:Nasdaq), Network Plus(NPLS:Nasdaq), McLeod USA(MCLD:Nasdaq) and ITC Deltacom(ITCD:Nasdaq) to market outperform, removing the companies from Goldman's recommended list. He also downgraded Equinix(EQIX:Nasdaq), Level 3 Communications(LVLT:Nasdaq), Metromedia Fiber Network(MFNX:Nasdaq) and XO Communications(XOXO:Nasdaq) to market perform from the recommended list, and he dropped Alaska Communications Systems(ALSK:Nasdaq), Allied Riser Communications(ARCC:Nasdaq), Focal Communications(FCOM:Nasdaq), Net2000 Communications(NTKK:Nasdaq) and Williams Communications(WCG:NYSE) to market perform from market outperform.
The analyst did leave several names on the recommended list: Global Crossing(GX:NYSE), Qwest(Q:NYSE), AT&T(T:NYSE), SBC Communications(SBC:NYSE), Allegiance Telecom(ALGX:Nasdaq), AT&T Wireless(AWE:NYSE), Nextel(NXTL:Nasdaq), Sprint PCS(PCS:NYSE) and BCE(BCE:NYSE).
Earlier this year, Governali downgraded the entire U.S. telecom sector to an underweight rating, believing that the individual companies will underperform the broader indices. He still thinks the stocks will underperform into 2002 because fundamentals haven't improved -- and there's hardly any indication that they will anytime soon.
Because the analyst didn't "follow through with specific stock downgrades within the group" when he issued the sector rating earlier this year, he felt it necessary to do so now.
Governali decided to go ahead with the individual downgrades because of the "increasing evidence" that long-term growth and short-term earnings targets are becoming "less achievable." Plus, the analyst has a "growing conviction that over the near term positive fundamental events are unlikely to materialize." Finally, the analyst said the sector is struggling with too much competition, intense pricing, restructuring initiatives and regulatory uncertainties.
While acknowledging the "untimely" point at which the downgrades came, the analyst said that "to varying degrees, stock prices already reflect this pessimistic assessment, but we believe that the group will continue to underperform until various challenges are worked through."
Level 3, Williams Communications and Worldcom all had their earnings estimates and price targets lowered along with the downgrades. Governali also cut his estimates and price target on Global Crossing, even though he didn't change his rating.
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