From Red Herring Online:
ANALYST UPDATE: ANALYSTS AGREE TO DISAGREE
By Peter D. Henig
June 29, 1998
Wall Street's more fun when analysts disagree.
And disagree they have, particularly in evaluating the fallout from AT&T's (T) $48 billion acquisition of Tele-Communications Inc. (TCOMA), and Disney's (DIS) slick dealmaking for 43 percent of Infoseek (SEEK).
How can one analyst see bull, when another sees bear? Good question.
Baby Bell jarred
Every deal has its darlings and its scapegoats; AT&T's buyout of TCI was no exception. Investors in @Home (ATHM), Cablevison (CVC), and General Instrument (GIC) couldn't have been happier with the merger's golden fallout; investors in the regional Bell operating companies (RBOC) must have felt just the opposite, given Ma Bell's newest initiative into their prairieland.
But what of Ameritech (AIT), the Baby Bell that offers both local and long-distance phone service, as well as cellular, paging, security services, cable TV, and Internet services? Analysts were split.
BancAmerica Robertson Stephens upgraded Ameritech from Long Term Attractive to Buy, while Merrill Lynch downgraded it from Buy to Accumulate.
Timothy Horan, analyst with Robbie Stephens, was confident that up was the right direction. "Ameritech got beaten up from the AT&T deal, but I see it as a positive because it's going to take AT&T a while before it will build out its network," he said.
Mr. Horan also sees an improving regulatory environment as a result of the AT&T-TCI merger; the FCC has already blessed the deal as "eminently thinkable." The European Union's top antitrust officials have also stated that there are now no obstacles blocking EU approval of WorldCom's (WCOM) proposed $37 billion merger with MCI (MCIC). That lays the groundwork for future approval of SBC's (SBC) plan to buy Ameritech, says Mr. Horan.
"If the MCI-WorldCom deal goes through, why shouldn't this?" he asks. And he notes that at current trading levels of 45.31, Ameritech is still trading at a 25 percent discount to the SBC's intended buyout price.
Friend or foe?
The outlook on Time Warner (TWX) was even more divided.
UBS Securities upgraded Time Warner's stock from Buy to Strong Buy the morning the AT&T-TCI deal was announced, while PaineWebber lowered its recommendation from Buy to Attractive the next day.
Time Warner should actually benefit from the AT&T merger, says Edward Hatch of UBS. Combined with recent decisions by fellow media titans Disney and NBC to put big money into Net ventures, the merger does a lot to validate Time Warner's own Net investments, he says.
"The [AT&T] deal means that the cable systems will only be getting more and more valuable," said Mr. Hatch. "Time Warner has the highest quality [cable] plant, and operates in the best demographic markets."
Mr. Hatch noted that by the end of 1997, Time Warner had upgraded 54 percent of its operations, rising to 77 percent this year, and higher still in 1999.
Other factors in Time Warner's favor? Mr. Hatch notes that Compaq (CPQ) and Microsoft (MSFT) recently paid $425 million for a combined 25 percent interest in Time Warner's Road Runner cable-modem service, which benefits from Time Warner's rich media content.
So why the downgrade by PaineWebber? Mr. Hatch is sympathetic: "To their credit, they might have done it on valuation alone." Could be. Time Warner's stock has run more than 10 points over the past two weeks, setting new 52-week highs at 88.81. Mr. Hatch has set price targets of 100 for the next 6 to 12 months, and 120 for 12 to 18 months out.
A whole new ballgame
Even if we hate 3Com (COMS) for plastering its name all over San Francisco's beloved Candlestick Park, there's no denying that the Street quickly became a fair-weather fan of the networking company after it posted surprisingly solid earnings for its fiscal fourth quarter ending in May.
3Com beat analysts estimates by a penny, posting earnings per share (EPS) of 0.18, even as the Street was expecting that consensus estimates of 0.17 would be a stretch. Pleasantly surprised, analysts from Tucker Anthony, BT Alex. Brown, Everen Securities, and Credit Suisse First Boston all upgraded the stock. Everen, CS First Boston, and Alex. Brown each raised the previously stumbling company to a Buy, while Boston-based Tucker Anthony upgraded it from Market Perform to Market Outperform.
"We raised our recommendation but lowered our earnings estimates at the same time, and the stock still went up 5 points -- go figure," said Bill Becklean, analyst with Tucker Anthony. "What really happened is that we all thought the quarter was going to be horrible, but it wasn't, so it looks like they're starting to do the right things."
But Mr. Becklean also noted that 3Com is not out of the woods yet. 3Com's first quarter, which ends in August, is traditionally a slow one, and Mr. Becklean emphasized that European sales will be "particularly tough" during that time.
"The other problem is that because the fiscal year ends in May, the sales guys have been trying to get all of their orders in before the end of the year so they can build up their bonuses, which could take away from the next quarter," said the analyst.
Tucker Anthony is forecasting flat sequential earnings for Q1 1999, and has a price target of 37 on the stock. 3Com is currently trading at 30.44 after recently hitting 52-week lows of 22.94.
Revving up the search engines
Lycos (LCOS), Yahoo (YHOO), and America Online (AOL) picked up yet more analyst coverage last week as Brown Bros. Harriman dove in with both horns, taking a bullish stance in all three stocks.
Analyst Dawn Simon initiated coverage of Lycos with a Buy, Yahoo with a Short Term Neutral/Long Term Buy, and America Online with a Long Term Buy shortly after news surfaced that AT&T had made a pass at buying AOL.
While that link-up fell through, analysts predicted that more deals would be on the way, and investors took that as a further sign to buy, with Lycos, Excite (XCIT), and possibly Netscape (NSCP) seen as tasty targets. Rumored suitors included Time Warner, News Corp. (NWS) and Viacom (VIA). Yahoo and AOL garnered additional bullishness on rumors that the two companies would soon be listed among the S&P 500.
Other pure Internet plays drawing attention from the Street included music retailers CDNow (CDNW) and N2K (NTKI), both of which were picked up by Volpe Brown Whelan analyst Andrea Williams. N2K was also started by Adams Harkness with an Attractive.
With AT&T's purchase of TCI, is it clearing away the cobwebs of its haunted past?
Among the media giants, it suddenly became clear that Infoseek is Disney's portal strategy.
Do any of the recent deals make sense to you? Give us your stock pick of the week |
