Williams Cos. (ASND customer) nice article in Microsoft investor.com entitled "Dialtone in the Pipeline"
beta.investor.com
Posted 3/13/98
Archived 3/20/98
TGIF
Dialtone in the Pipeline
Natural-gas giant Williams Cos. is remaking itself as a telecom
leader. Will its vast new fiber-optic network click with investors?
By Roger Hahn
Qwest Communications (QWST) upped the stakes this week in the
nation's increasingly intense fiber-optic network wars by announcing
that it planned to acquire LCI International (LCI) and create the
fourth-largest U.S. telephone company. The deal, if approved by
regulators and shareholders, would rank the combined new
company behind only AT&T (T), Sprint (FON) and WorldCom
(WCOM).
Remaining unranked in the telecommunications-giant-of-the-future
contest -- and a lot cheaper than most of its rivals -- is a fierce
competitor whose primary business isn't even data and voice. And
that firm, Williams Cos. (WMB), could ultimately be a superior bet
for many investors than any of its better-known foes.
Highlighted
Companies
3 Yrs. Vs. S&P
AT&T
Concentric Network
Intermedia
Qwest
Sprint
U S West
Williams
WorldCom
Williams, which is more renowned as the nation's leading owner of
natural-gas pipelines, kicked off 1998 by announcing three contracts
with phone companies to lease capacity on a 32,000-mile fiber-optic
network it is building. In addition to a five-year, multimillion-dollar
deal with U S West Communications (USW) -- which Williams
described as akin to a mall signing on an "anchor tenant" --
agreements were signed with Intermedia Communications (ICIX) and
Concentric Network Corp. (CNCX), in which Williams owns a 21%
stake.
The beauty in Williams' push to build a national fiber-optic network
is that it is no rookie at the endeavor. In 1995, Williams sold its first
fiber-optic network to WorldCom for $2.5 billion, retaining rights to a
single trunk line. Indeed, without Williams' original vision to build a
national fiber network during a time of faltering natural-gas prices in
the 1980s, you might never have heard of WorldCom.
A Natural Fit
What's a natural-gas pipeline firm doing in telecommunications?
Using its vast network of rights-of-way to lay cable, for one thing.
"Pipelines," Williams chief executive Howard Jantzen has said, "are
just large national networks requiring many of the same processes
as telecom networks to operate efficiently."
Indeed, the entire natural-gas industry has caught telecom fever.
Pipeline firms are the first segment of the nation's utility
infrastructure freed by a two-decade-long deregulatory process. The
firms several years ago left the safe harbor of wholesale energy
transmission to explore businesses that promise faster growth and
fatter profits. The best have been enviously successful.
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Consider, for example, that $10,000 invested in Williams Cos. five
years ago would be worth $51,149 today -- a far cry from the
$23,332 that an investment in the Standard & Poor's 500 Index
would be worth, or the $42,230 you'd have in WorldCom and
$26,194 you'd have in Sprint.
Going forward, the prospects look even brighter -- though there is
ample reason for caution. Following a year in which natural-gas
pipeline companies overall underperformed their peers in the energy
sector, the group's leaders find themselves trying to decide what
they really want to be when they grow up. Some are beginning to
look more like wild and crazy oil-and-exploration companies, whose
fortunes fluctuate with commodity prices. Others, like Williams, are
trying to straddle the old and new worlds. Williams is acquiring more
gas-pipeline concerns to bolster revenue and earnings growth in the
short term while laying the groundwork to become a telecom giant
early in the next century.
Once these uncertainties are cleared away, leading industry
analysts believe that Williams, and possibly others, could be the
surprise blue-chip stocks of tomorrow.
"There's certainly some confusion and uncertainty surrounding the
group," says Susan Weaver, of the brokerage Howard, Weil,
Laboussie, Friedrichs, "but ultimately, the long-term potential clearly
is there. What the group's proponents are betting on is a Warren
Buffett approach: Buy 'em and hold 'em. The thinking is, if you can
hold on for a year or two, you could double your money."
Even a skeptical observer argues that dramatic returns could begin
appearing as soon as this summer. After all, the value equation is
clear: Qwest's trailing price-earnings multiple is stratospheric at
494, while WorldCom's P/E is 94. Williams' P/E multiple of 30 looks
positively cheap on a relative basis, and it's a result of Wall Street
not believing it will grow as fast as its more glamorous rivals.
"Typically, gas-pipeline companies tend not to perform well when
natural-gas prices are struggling," says David Fleischer of Goldman
Sachs. "Also, coming out of winter, these stocks tend not to do
well. So I really can't get excited about the next three months. But
these are solid, well-run companies, and the best should grow 15%
or better a year. They're available now at nice, low valuations. And
their performance could get a lot more interesting in about six
months."
What's not to like,
really, about a stock
like Williams? Last
year, its shares
posted returns of
52%.
A Diversified Stock
What's not to like, really, about a stock like Williams? Last year, its
shares posted returns of 52%. Its vast fiber-optic network is the
second the company has built, giving it an edge in experience. It
has a successful division that carries broadcast video transmissions
for the TV networks. And its successful energy-marketing division
was bolstered significantly by last fall's acquisition of MAPCO, a
liquids pipeline, refining and marketing company chosen for its
geographic and strategic fit.
Ice that cake with the recent fiber-optic leasing deals, and what have
you got?
"About a third of Williams' stock price now is telecommunications,"
Fleischer insists. "How can you tell what it's worth? Do you value it
like Qwest, a telecom company also building a fiber-optic network,
which went from $25 at its IPO last spring and has been trading
around $75? No one will know what telecom is worth until we see
what Williams can make of it."
But Weaver sees some clues from last year. "The company didn't
suffer much at the hands of analysts," she explains. "Every quarter,
it turned in disappointing earnings and no one seemed to care!
Analysts can be very forgiving, especially when it comes to
expensive start-ups like fiber optics."
Telecom could
become a major
contributor to
Williams' bottom
line as soon as 1998
or 1999.
Williams' first network was sold outright; the current infrastructure
was conceived as a leasing opportunity. "Williams' strategy now is
to become the carriers' carrier," Weaver says. "The company
certainly learned a lot from its first go-round, and once it gets past
absorbing the initial investment in operating costs, Williams will
begin to see tremendous advantages."
The agreement with U S West could add $3 per share to earnings
by 2000, Weaver says. Or things could move a lot faster. "Telecom
could become a major contributor to the bottom line as soon as
1998 or 1999," she says. "It all depends on how quickly Williams
can turn the increase in revenue into profits."
So far this year, investors are betting that Williams will succeed. Its
shares are up 16.7% in 1998 -- 10 percentage points better than the
broad market -- and show no signs of getting stuffed in the pipeline.
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