Qwest Doting
The Take
March 18, 1999
by Phil Harvey
Qwest Communications' (QWST) stock has clawed its way up 14 points since the beginning of the year, hit a new high on Monday and still has plenty of growing room, some analysts say.
Morgan Stanley Dean Witter (MSDW) analyst Peter Kennedy upgraded his rating on the stock to "strong buy" earlier this week. He noted that MSDW did so because Qwest had clearly articulated its intentions for reaching local and international customers, as well as getting most of its customer's traffic onto the Qwest network.
What does that mean? It's simple, really: Charles Goldman, a principal at Chase Capital Partners, says the company is looking to build a business around the high-capacity IP-based networks it's built. Qwest spokesman Tyler Gronbach adds that while in 1997 the company focused on building its network, in 1998 it concentrated on partnerships and alliances. This year, Qwest will begin delivering services to customers on a wider scale than before.
One such service that's been announced already is Qwest's Q.Commerce service, which helps companies build e-commerce sites on the Internet. To help push Qwest products and services, the company will lean on Microsoft's 88,000 certified solutions providers, as well as its own sales force. Microsoft (MSFT), you'll recall, put $200 million into the company late last year. Gronbach suggests that it may make sense for Qwest to partner with local exchange carriers in some instances to get to more customers.
Qwest currently has a partnership with the Dutch telco KPN, with a service called KPNQwest. Qwest will likely fashion upcoming alliances in Asia and Canada after the joint venture.
Another move that's given analysts confidence in Qwest's local strategy is its investment in Covad (COVD), a DSL provider.
One other area of note in Kennedy's table-pounding report was that Qwest stands to significantly improve its margins on these new services as it moves its customers' traffic from leased networks to its own network. When the company first started building its network, it was forced to lease equipment from other companies.
But through its network build-outs and its acquisition of LCI International (LCI), making it the fourth largest long-distance company in the U.S., it gained several long-term leases on fiber routes to carry Qwest services.
Kennedy says Qwest expects to transition over 80 percent of its traffic onto its own network by the end of 1999, reducing its lease payments on equipment by more than $10 million a month.
As the company moves to a higher-margin suite of services and finishes building out its network, many analysts feel Qwest will continue to post some impressive growth. And, as MSDW's Kennedy points out in his research, the stock is "extremely cheap" compared to its peers.
Phil Harvey (pharvey@upside.com) writes for Upside Today.
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