Where Telecom Bargain Hunters Turn
By BARNABY J. FEDER
The New York Times
May 12, 2002
It has been two months since Ivan G. Seidenberg, the chief executive of Verizon Communications, mused at an investment conference that his company might bid for WorldCom "for the fun of it" if the stock price of that long-distance and Internet carrier continued falling.
Since then, WorldCom's shares have dropped 80 percent, to $1.58 on Friday. But as Mr. Seidenberg wryly suggested, conditions in the communications sector are so tough that Verizon has no real interest in WorldCom at any price. Verizon, along with rivals like SBC Communications, BellSouth and Deutsche Telekom , all have plenty of their own problems without taking on WorldCom's, which include gigantic debt and an accounting investigation by the Securities and Exchange Commission.
How bleak has the telecommunications scene become? Verizon's shares closed yesterday at $39.35, down 17 percent for the year, yet its investors can count themselves lucky. Telefonos de Mexico is the only member of the American Stock Exchange's index of 14 large North American telecommunications companies that has fared better since Jan. 1. Telefonos has risen 4.3 percent for the year, while the index has declined by 39.2 percent.
Such troubles invariably create opportunities for bargain hunters. Some portfolio managers have begun snapping up shares of equipment makers like Lucent Technologies, Nortel Networks and JDS Uniphase in the belief that the worst is over for them. Risk-tolerant investors have been heeding analysts who believe that the prices for some bonds issued by Qwest Communications International had dropped too far. Since April 30, the 10-year note issued in March by Qwest Corp., the company's operating subsidiary, has risen 3.4 percent to $100.54. And despite a drop in Worldcom's credit rating to junk status, the company's 3-year note maturing in May 2004 rose 23 percent for the week, closing at $68.77.
Some stock analysts recommend that investors consider companies like Alltel, CenturyTel and Commonwealth Telephone that serve rural areas. "Rural phone companies are great defensive alternatives," said Cannon Carr, who follows them for CIBC World Markets. Such companies receive government subsidies, have minimal involvement in the money-losing wireless segment and can market higher-priced services like broadband Internet links with less competition from the cable industry. On May 2, Commonwealth, based in Dallas, Pa., projected revenue growth of at least 3 percent this year and raised earnings estimates by 15 cents a share, to at least $2.
Abel Garcia, portfolio manager of the AIM New Technology fund, says the best bets in the sector are leading equipment companies, especially those in the consumer segment like Nokia, the world's largest cellphone maker, or UTStarcom , a leader in China's rapidly growing wireless business. "But we're not recommending any exposure to telecom," Mr. Garcia said. "Tech investors are better off looking at semiconductors or game companies."
From Wall Street's perspective, the industry's biggest problem may be its inability to merge long-distance companies like AT&T and WorldCom into the large local and wireless carriers. Wall Street would also like to see the wireless industry consolidate into three or four national companies.
"The telecom industry is beset by destructive competition in almost every sector," said Frank J. Governali, who follows the major conventional telecommunications companies for Goldman, Sachs. But Edward E. Whitacre Jr., the chief executive of SBC, told investors last Monday that the government appears to oppose more big mergers.
Wireless companies are still adding customers, but they spend less time on their phones. Most of the companies are losing money, and there is uncertainty about consumers' willingness to pay for services like high-speed data transmission. AT&T Wireless , the largest publicly traded cellphone service in the domestic market, closed at $7.47 on Friday, down 75 percent from its initial offering price of $29.50 in 2000.
The conventional, or landline, companies, which Wall Street expected as of November to report revenue gains of 9 percent for this year, are now projected to end up with a 12 percent decline, according to Thomson Financial/First Call. The biggest phone companies are expected to continue cutting capital investments this year, which could deepen the slump at equipment suppliers.
It was fashionable last year for analysts to see the industry's problems as a temporary adjustment to excessive investment in new networks and services in the late 1990's. Now fears are rising that telecommunications has too much in common with industries like steel and airlines, in which profitability has been undermined repeatedly by overcapacity and competitive pressure.
That pressure extends well beyond the obviously declining segments, like long-distance voice service via landlines. Internet traffic doubled last year, but carriers were able to increase revenues from it by only 17 percent, according to estimates published last week by RHK, a market research firm.
Adam Quinton, who follows the landline carriers for Merrill Lynch , recently concluded that their modest growth prospects over the next five years were comparable to those for gas and electric utilities. But big regional phone companies like Verizon are trading at an average of 12.5 times projected earnings for next year, compared with 11.3 times for the major electric utilities. That makes the phone sector look like a riskier bet. The only stock Mr. Quinton is recommending among those he follows is AT&T, and that is only because the company still owns the huge cable television business it has agreed to sell to Comcast. Until that deal closes, AT&T is a back-door way to invest in cable, according to Mr. Quinton.
AT&T and WorldCom provide a broad range of voice and data services to global companies, but their long-distance phone businesses are losing traffic to cellphones, e-mail, instant messaging and systems that send calls over the Internet. In addition, Verizon, SBC, BellSouth and Qwest, which own the local phone businesses created by the AT&T breakup in 1984, are gaining regulatory clearance to re-enter the long-distance business in their territories.
In the first group of states where the Baby Bells have begun selling long-distance along with local service, they have quickly grabbed as much as 20 percent of the market. Analysts from research firms like the Yankee Group expect that share to rise to 50 percent over the next few years. The battle is shifting quickly toward which companies can offer the most attractive bundles of local, long-distance, wireless and broadband services. That leaves the Baby Bells as the likely winners and better bets for long-term investors, many analysts say.
Fans of the Baby Bells say these companies' dominance in their home regions gives them a strong foundation for riding out the sector's problems, and, to the extent allowed by the government, for buying assets from bankrupt competitors. Two of them — Verizon and SBC — also have solid dividends, yielding well over 3 percent.
Patrick Comack of Guzman & Company expects that many prime assets of AT&T and WorldCom, including their services for big businesses with global operations, will eventually end up in the hands of one or another of the Baby Bells, known in the industry as regional Bell operating companies, or RBOC's. "At the end of the day, you're going to have the RBOC's battling each other," Mr. Comack said |
