Growth Report Free
growthreport.com
Volume 5, Issue 9
January 21, 2005
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Big Little House on the Prairie
Alltel proves it’s got the gumption to play with telecom’s big boys.
Telecom executives haven’t proven they’re the brightest bulbs in the circuit. To the contrary, many of their strategic decisions have turned out to be everything but. AT&T (NYSE: T) couldn’t have made more bad acquisitions if it had tried. Sprint’s (NYSE: FON) purchase of Nextel makes sense in terms of scale – but not much else; certainly not in terms of matching technologies or corporate cultures. And the former Worldcom, now part of MCI (NYSE: MCI), well, let’s not go there. Bad aftertaste.
One company stands above all that; and thankfully so. Alltel Corporation (NYSEL AT), a Little Rock, Arkansas-based wireless and wireline telecommunications company that also offers network access and Internet services, is of a different breed. Including dividends and earnings, Alltel has generated higher returns over the past five years than Sprint, Verizon (NYSE: VZ), BellSouth (NYSE: BLS) and SBC Communications (NYSE: SBC), and has raised its dividend issued to shareholders 44 years in a row. The company engaged in $18 billion worth of acquisitions over the past six years, not including the proposed $6 billion acquisition of Western Wireless proposed last week, yet still has $648 million in cash on its books in its most recent quarter. (Total debt was $5.61 billion for the quarter, far lower than its industry competitors.)
Yet, the nugget of Alltel’s success is its ability to offer subscribers the power of national wireless calling plans much like any of the other larger wireless carriers, yet retain its niche as a regional carrier with a major footprint across rural America. Specifically, Alltel possesses a lucrative and strategically important roaming agreement that allows Verizon the use of Alltel’s network at very competitive rates and, in return, allows the regional carrier to offer the national coverage others would covet.
Now, Alltel is smartly expanding that rural niche with its proposed Western Wireless acquisition, potentially making it the fifth-largest wireless company in the country. Western Wireless will blend its customers in the West and Midwest with Alltel’s subscriber base in the West and South, while also adding 1.6 million international customers from 6 foreign countries to Alltel’s previously domestic-only customer audience.
At face value, this is simply smart business on Alltel’s part. Underneath, it’s actually quite brilliant for a number of reasons. First, it keeps Alltel up with the pack of market leaders (Sprint’s purchase of Nextel will vault it from 5th largest wireless company to third), allowing Alltel to compete regionally without being left out of the national wireless industry race for subscribers. Second, it further expands its footprint as a provider of roaming services, upping its value not only to its direct wireless subscribers, but also to its roaming partners who don’t have coverage across rural America and would be loathe to spend the money to build it on their own. (Alltel estimates that the purchase of Western Wireless will allow it to gain coverage over one-fourth of the US population and half the land mass of the lower 48 states.) Third, it allows the company to maintain its impressive revenue and earnings growth which has made it a darling of Wall Street, while also cementing its strategic value to any potential suitors who might wish to acquire it in the future – namely Verizon.
Performance-wise, Alltel was second only to Sprint within the telecom industry in terms of share price appreciation in 2004, with Alltel shares rising by 26.1 percent last year to Sprint’s 51.3 percent gain. Yet, Alltel’s P/E ratio by the end of the year was still only 17.7 as compared with Sprint’s richly valued 32.9 times earnings. In fact, Alltel’s earnings for the entire previous fiscal year grew an impressive 43.9 percent, while net income for the most recent nine months of this fiscal year rose 9 percent on revenue growth of just 2 percent.
Clearly, no one can expect miracles from the telecom industry where consolidation will continue to weigh heavily upon acquirers and the objects of their affection. Still, it’s genuinely refreshing to see a company continue a tradition of smart business decision making that seeks to reward shareholders over the long haul. We rarely see it in telecom, and even less so in other far more unsavory and unstable business sectors (the airlines, perhaps? Ahem.) Kudos to Alltel for, at the very least, being refreshingly bright and reminding us that investors need not always be thought of last. |
