Thursday, March 5, 1998
Without a Big Deal, BT's Big Move Could Fade
By Vito J. Racanelli
Since the beginning of the year, British Telecommunications PLC's stock
has been on a tear, moving up an impressive 20% -- almost 30% before a
broader market pullback this week. It has soundly beaten both its peers
and the broader U.K. market, which is up about 10% this year.
To be sure, BT has benefited nicely from a huge influx of foreign cash
-- much of it from the U.S. -- into U.K. markets, propelling the FTSE
index to record levels. And, as the former domestic monopoly telephone
company, BT has been a favorite of institutions. Also, unlike some of
its competitors, BT has little or no exposure to Asia, and that has
built a safety net around its stock.
Finally -- and perhaps most importantly -- speculation is intensifying
that BT will be involved in some sort of a merger this year. In fact,
rumors are flying about the City of London that BT could be the target
of a U.S. company.
With BT's market value at $61 billion, that looks like a long shot.
What's much more likely is that BT will buy a U.S. telecom company to
take the place of MCI Communications Corp., which BT lost to WorldCom
after it cut the price it was willing to pay for the U.S.'s second
largest long distance provider. Still, BT can salve its lost pride with
the $7 billion in cash it will get from WorldCom for the sale of its 20%
stake in MCI .
But sudden riches bring problems of their own. With the shares' brief
but dizzying ride to as high as 103 earlier this week (BT's ADRs fell 3
1/8 to 96 3/8 Thursday, still up 20% from the 80 5/16 closing price at
yearend), some observers are now suggesting that the stock price cannot
be supported by the company's intermediate-term growth prospects. What's
worse, "deal" disappointment -- highly likely given the intense
expectation now built into the price -- could lead to a more sober
assessment of BT's shares later this year, some argue.
For example, by most analyst accounts, the company's earnings growth
through the fiscal year ending March 2000 is likely to be in the low- to
mid-single digits annually, less than that of its peers and the broader
U.K. market. Meanwhile, BT stock changes hands at about 18x estimated
1999 profits, in line with its European peers and at a slight discount
to the overall U.K. market. And BT's share of Great Britain's
long-deregulated telecommunications market will continue to erode,
though perhaps at a slower pace than in years past.
That makes overseas expansion vital. But while BT has made some
impressive moves in local markets all across Europe, its losses on the
Continent probably won't peak until fiscal 2000, and who knows when
profits will start rolling in? But the biggest question mark on BT is
the centerpiece of its global growth strategy: finding an attractive
asset in the U.S. With its ambitious plans to buy MCI blown apart last
year, the company faces an array of expensive, unappetizing choices with
which to fill that void.
Mark Lambert, a London-based analyst at Merrill Lynch , calls the
company "strategically challenged." Lambert, who rates BT's stock
Neutral, notes that BT could buy one or more fast-growing competitive
local exchange carriers (CLECs). Specific names haven't been mentioned
yet, but the group, which includes such players as IGC Communications
and Nextlink Communications, already has had a nice run. Some analysts
fear that the stocks' high valuations would dilute BT's earnings right
off the bat.
A regional Bell operating company (RBOC) -- which all have market
capitalizations upwards of $25 billion -- could prove too big for BT to
swallow, and regulatory barriers would be treacherous. Even so, the
RBOCs' own low-double-digit earnings growth rates probably wouldn't do
much for BT's bottom line, notes ABN Amro analyst James Ross. And for
various reasons, a matchup with the remaining large U.S. long-distance
players -- Sprint and AT&T -- doesn't seem plausible.
And as BT's stock price runs up, the pressure is mounting on management
to come up with a replacement for MCI when few appealing alternatives
exist. "&hellipSomething has to happen," says Alfredo Carrozzo, a
Zurich-based portfolio manager for Vontobel Asset Management, which is
overweighted in the stock.
The upshot: Any deal that isn't perceived as a big winner by Wall Street
or the City could cause investors to take their profits and run.
AMD's Prospects Are Good Despite Earnings Shortfall
Chip behemoth Intel's warning late Wednesday that its first-quarter
revenues and profits would come in lower than expected ripped through
the financial markets like El Nino, driving the technology-laden Nasdaq
Composite down 47.78 to 1711.92 in Thursday's trading.
To make matters worse, Intel's chief rival, Advanced Micro Devices,
stated in a 10-K filing with the Securities and Exchange Commission this
week that it expects revenues in the first quarter of 1998 to plunge and
net losses to rise significantly from the fourth quarter of 1997, when
the company reported a loss of nine cents a share. Analysts already had
been expecting AMD to lose 19 cents a share in the first quarter,
according to Zacks Investment Research. Still, news of the SEC filing
sent AMD's shares tumbling 2 5/16 Wednesday, though it bounced back a
bit Thursday to close at 21.
Although AMD didn't disclose the reason for the increased losses, it
appears to be the same old story: production problems, which have held
back AMD's stock for ages.
In our December 16th Weekday Trader column ("AMD is Poised to Rebound --
If It Can Deliver"), we pointed out that AMD's biggest problem has been
its inability to produce enough of its critically acclaimed K6
microprocessors to meet growing demand. The company has had a tough time
making the transition to 0.25-micron circuit widths from the current
standard of 0.35 microns. (The industry has been moving toward these
smaller circuit widths because they allow more information to be stored
on a single chip, which improves performance.)
Piper Jaffray analyst Ashok Kumar says that after speaking with contacts
at the company, he believes the first-quarter losses stem from the fact
that 0.35-micron chips still comprise two-thirds of AMD's production at
its Austin, Texas chip-fabrication facility. In a conference call with
analysts late last year, AMD's management predicted that 0.25-micron
chips would make up most of this facility's production by the end of the
first quarter.
Kumar, however, thinks that the company will finally start showing some
progress in this area in the second quarter, noting that the worst of
the problems has already been factored into the stock price. "I'm
hearing more good news than bad news coming out of there," he says. In
the long run, the recently announced deal with IBM to produce more K6
chips should help ease AMD's production bottlenecks.
And Intel's latest bombshell isn't likely to hurt AMD, either. Dan
Scovel, analyst at Fahnestock & Co., notes that even if the market for
personal computers shrinks, AMD still has plenty of pie to steal from
Intel, which produces nine out of every ten microprocessors sold today.
He also says AMD has ample room to boost its gross margins, to about
50%. (They were only 33% in 1997.) By contrast, Intel's gross margins
are likely to move in the opposite direction, from about 64% toward the
50% level, he contends, as it faces pricing pressures in many markets.
But perhaps most importantly, AMD is making significant inroads in the
most dynamic area of the PC market -- computers costing less than
$1,000. In our December 16th column, we pointed out that the company's
lower-cost K6 microprocessor has become the chip du jour among big PC
manufacturers like IBM, Digital Equipment and Compaq.
What we said then still looks valid today: If AMD can get its production
in gear, and if sub-$1,000 computers continue to grab more of the PC
market, then AMD should gain enough ground at Intel's expense to push
its stock higher than the $18 at which it traded on December 16th.
-- Lisa R. Goldbaum
------------------------------------------------------------------------
To subscribe for free email delivery of Weekday Trader, a Barron's
Online exclusive. Click here.
------------------------------------------------------------------------
Copyright c 1998 Dow Jones & Company, Inc. All Rights Reserved.
BARRON'S Online Weekday Trader is located at
interactive.wsj.com
To remove yourself from this list just send email to:
stop-barronstrader@lists.wsj.com or point your browser to:
interactive.wsj.com
If you have other questions, please call our customer service group at
1-800-369-2834. |
