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Get Four
|  | MAY 9, 2005
"Telcos Can't Afford to Stand Still"S&P's Todd Rosenbluth recognizes that wireless, broadband, and cable pose challenges to telcos, but he still sees a few buysA shakeout is coming in the telecommunications industry, stemming in part from two pending mergers of giants -- Verizon Communications (VZ ) with MCI (MCIP ), and SBC Communications (SBC ) with AT&T (T ). Todd Rosenbluth, Standard & Poor's analyst of telecom services stocks, sees the two resulting companies competing in a nationwide market for both consumers and businesses. And that's one reason S&P recommends that investors underweight telecom stocks in their portfolios. The latest results from telecom companies, Rosenbluth points out, show that growth is coming mainly from newer services such as wireless, broadband, and the inclusion of long distance into the service bundle for the local carriers. And there are also looming threats from cable companies and the Internet. Despite this environment, Rosenbluth points to an S&P strong buy rating on CenturyTel (CTL ) and to buy [ratings] on Verizon, Citizens Communications (CZN ), and General Communication (GNCMA ), an Alaskan phone service provider. These were a few highlights from an investing chat with Rosenbluth presented May 3 by BusinessWeek Online on America Online. Rosenbluth responded to questions from the audience and from Jack Dierdorff of BW Online. Following are edited excerpts from this chat. AOL subscribers can find a complete transcript at keyword: BW Talk. (Todd Rosenbluth is an S&P Equity Research analyst. He has no ownership interest in or affiliation with any of the companies under discussion in this chat. All of the views expressed in this chat accurately reflect the analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this chat. For required disclosure information and price charts for all S&P STARS-ranked companies, go to spsecurities.com and click on "Investment Research" and then on "Required Disclosures & Standard & Poor's STARS vs. Closing Prices Charts.") Q: Todd, in this relatively flat market, how have the telecom stocks been doing? A: S&P recommends investors take an underweighted stance to the telecom services sector. Year-to-date, through the end of April, the integrated telecom services index declined 8.7%, underperfoming the S&P 1500 Index, which fell only 4.7% in that time period. We at S&P continue to believe these telecom stocks will lag [behind] the broader market in the near term. Q: How are things on the consolidation front in telecom? Any views on the battle over MCI between Verizon Communications and Qwest (Q )? A: As I am sure our audience is aware, the battle for MCI and its long-distance and enterprise assets has been a heated one. Yesterday, Verizon agreed to terms to acquire MCI and, subsequent to that announcement, Qwest pulled out of the bidding process. Assuming regulatory and shareholder approval is granted for Verizon, we expect Verizon to suffer only modest dilution in the integration process. We have a buy recommendation on Verizon shares, due in part to its attractive dividend yield and its wireless capabilities. As for Qwest, we believe the company faces sizable challenges as a stand-alone in the wireline industry. Q: So how do you rank Qwest and MCI now? A: We reiterated our sell recommendation on Qwest shares this morning. The company reported results that were in line with our estimates. However, we think the prospects for Qwest remain weaker than [those of] its Baby Bell peers and yet, in our view, Qwest trades at an unwarranted premium [compared] to its peers. We have a $3 target price for Qwest. Regarding MCI, we believe the deal it has in place with Verizon will be the driver for MCI shares in the near term. In our view, MCI faces challenges on its own, and the company has been more inefficient than its major peer, AT&T. Q: Any other telecom consolidation to watch -- or brewing? A: Yes, the MCI saga followed an agreed-upon deal in which the aforementioned AT&T has agreed to be acquired by SBC Communications in a deal that we believe will close in early 2006. We believe this SBC deal, combined with the Verizon planned merger, will shake up the telecom industry in the coming years, as these two industry leaders will have the ability to compete on a nationwide basis, offering services to both consumers and businesses. This is in part our rationale for recommending a negative stance on the wireline industry. Q: What's the S&P view on SBC? A: We currently have a hold recommendation on SBC shares. We believe the company's dividend yield remains an appealing aspect to the stock. However, we expect that, in the near term, the company's EBITDA [earnings before interest, taxes, depreciation, and amortization] margins will hold at around 31% below its peers. We await both shareholder and multiple approvals from state and regulatory bodies before making revisions to our outlook based on the planned deal with AT&T. Q: You referred to the Verizon dividend -- any other telecoms worth looking at for income? A: Earlier today, one of our buy recommendations in the telecom sector, Citizens Communications, reported results. CZN has a dividend that yields 7.9%, and the company, in our view, continues to generate strong amounts of cash flow from its rural telecom operations. Also in the news today was rural phone provider Commonwealth Telephone Enterprises (CTCO ). The company announced it was instituting an annual dividend of $2 and also paying a special dividend of $13 per share, both to begin at the end of June. We believe the dividend yield for CTCO shares is supported by strong cash flow, and we recommend investors hold the shares.
BW MALL
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