Qualcomm Inc (QCOM)

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Telecom Services' Wide Appeal, S&P's Todd Rosenbluth says many players are cash-healthy and should benefit from the buildout of wireless-broadband networks
Nov 30, 2004

http://www.businessweek.com/bwdaily/dnflash/nov2004/nf20041130_4426_db006.htm

What's the only sector Standard & Poor's currently has an overweight recommendation on? Answer: telecom services. That group has been outperforming the market so far in 2004, says Todd Rosenbluth, a Standard & Poor's analyst who covers these stocks.

Rosenbluth has several strong buys in telecom services and related companies -- Verizon (VZ ), BCE (BCE ), CenturyTel (CTL ), Alltel (AT ), and Amdocs (DOX ). S&P also lists as strong buys Nextel Communications (NXTL ), Nextel Partners (NXTP ), Qualcomm (QCOM ), and Motorola (MOT ).

Rosenbluth says the factors favoring such stocks include significant free cash flow to support capital spending and dividends, and in some cases, advantages resulting from competition among wireline, wireless, and cable-service providers.

Although wireline service continues to lose ground to wireless, the dominant players in wireless are also wireline companies, which reduces their risk, Rosenbluth says. He notes that the three largest wireless providers in the U.S. are Cingular, owned jointly by BellSouth (BLS ) and SBC Communications (SBC ); Verizon Wireless, owned jointly by Verizon and Vodafone (VOD ), and Sprint PCS (PCS ), owned by Sprint (FON ).

These were among the points Rosenbluth made in an investing chat presented Nov. 23 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and from Jack Dierdorff of BW Online. Following are edited excerpts from this chat. AOL subscribers can find a full transcript at keyword: BW Talk.

Todd Rosenbluth is a Standard & Poor's Equity Research Services 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 analyst's 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, the broad market had a very nice post-election run-up but is sort of resting now. How have the telecom stocks fared in these recent days?
A: The integrated telecom stocks that I primarily follow are up nearly 6% in the last 13 weeks. (as of Nov. 19), modestly underperforming the S&P 500. Thus far in 2004, telecom services stocks have been outperformers, and we continue to recommend investors overweight the telecom services portion of their portfolios.

Q: What are your top five picks?
A: The strong buy recommendations from S&P in telecom services and related space, in no particular order, include Verizon, BCE, CenturyTel, Alltel, and Amdocs. I follow all five of these stocks for Standard & Poor's. However, my colleagues have telecom stocks Nextel Communications, Nextel Partners, Qualcomm, and Motorola ranked as strong buys.

Q: Is there any common thread among those stocks making them attractive?
A: Yes, there are two threads that can be pulled together. On the pure telecom-services side, we favor stocks that are generating significant free cash flow to fund capital expenditures and also support relatively strong dividend payouts. Among the stocks in this group are Alltel, Verizon, and BCE. The telecom-related stocks that I mentioned, such as Amdocs, Qualcomm, and Motorola, to name just a few, we believe will be beneficiaries of the competitive environment from wireline, wireless, and cable-service providers.

Q: Anything new happening with the trend to fiber? Your thoughts on Corning (GLW )?
A: My colleague follows Corning shares and has a hold recommendation on the stock, based largely on discounted cash-flow and book-value metrics. We at S&P expect Corning to benefit over the long term from accelerated fiber-to-the-home deployments by telecom operators. In recent weeks, we've heard added insight on the strategy to deploy fiber from both Verizon and SBC Communications.

Q: Your opinion of Nextel?
A: We have a strong buy, or 5 STARS [STARS is S&P's Stock Appreciation Ranking System], on Nextel Communications. We believe the stock is attractively priced relative to its peers. We view favorably Nextel's spectrum agreement announced earlier in November and believe the company's strong brand name has helped to keep its customer turnover at the low end of its national carrier peers.

Q: What about SBC?
A: We have a sell recommendation on SBC Communications. We believe it faces multiple challenges in its wireline and wireless operations that will prevent the company from improving its below-average EBITDA [earnings before interest, taxes, depreciation, and amortization] margins in the near term. Despite a relatively high dividend yield, we believe there are more attractive investment alternatives in the telecom space.

Q: Has the old AT&T Wireless gone live in its new identity?
A: Cingular's acquisition of AT&T Wireless was completed earlier this month, but we believe the integration of these carriers will be complicated and be dilutive to the earnings of parent companies SBC and BellSouth. When quarterly numbers are reported at the end of 2004, we expect Cingular will be the largest wireless carrier in the U.S., but [we] expect there to be continued market-share battles between Cingular and Verizon Wireless. Separately, we expect AT&T (T ) to offer a wireless service at some point in 2005.

Q: Your opinion, please, on Sprint.
A: We have a hold recommendation on Sprint shares. We believe revenues should continue to be aided by wholesale wireless gains and wireless data services. However, we're concerned by the increased access-line losses reported in the third quarter and competitive pressures in the long-distance segment. We believe Sprint deserves to trade at its current EBITDA discount to peers.

Q: Can you recommend a few stocks in the telecom industry that would benefit from a falling dollar?
A: Most of the telecom services stocks that I follow for S&P are based solely in the U.S. However, we do have a strong buy recommendation on Canadian telecom carrier BCE and a hold recommendation on Telefonos de Mexico (TMX ). Both carriers face less competitive pressure in their markets than their U.S. counterparts and provide what we view as a healthy dividend yield to investors.

Q: What's BellSouth's value?
A: S&P has a strong sell recommendation on BellSouth. We believe the company faces sizable challenges in both wireline and wireless operations.

Q: Do you have any sells or strong sells besides SBC and BellSouth?
A: In my coverage universe, we also have a sell recommendation on shares of telecom-services provider SureWest Communications (SURW ). SureWest access line losses in its most recent quarter were wider than its small telecom peers. In addition, we expect higher depreciation expenses and delayed broadband buildouts to depress future results. My colleague also has a sell recommendation on U.S. Cellular (USM ) shares. In our view, USM may realize double-digit revenue growth in 2005 with flat margins. However, with the stock priced above peers on a p-e basis, we have a sell recommendation on the shares.

Q: Is wireline service continuing to lose ground to wireless? And what are the implications for telecom stocks?
A: We expect that minutes of use will continue to flow from wireline services to wireless services as we head into 2005. However, the three largest wireless providers in the U.S. are owned by wireline carriers. We have Cingular, owned jointly by BellSouth and SBC. Verizon Wireless owned jointly by Verizon and Vodafone. And Sprint PCS is owned by Sprint.

So as minutes of use flow from one side of the telecom provider's operations to the other, we expect the traditional wireline providers to be only somewhat affected by the technology shift. However, we view competition from cable-service providers as hurting results for the wireline carriers in the near term.

Q: Do you have thoughts on any phone providers beyond Motorola?
A: My colleagues have hold recommendations on the ADRs [American depositary receipts] of Nokia (NOK ) and Ericsson (ERICY ). As for Nokia, despite better-than-expected recent results, it remains evident to us at S&P that weak average selling prices and intense competition are hurting profitability.

Q: What will be the effect for consumers of fiber-to-the-premises? Will it cost them more?
A: We believe it's still too early to get a sense of the benefits of these new fiber-based video and high-speed data products, as many of them are still being tested in the lab. We believe that consumers will be offered more choices and an expanded bundle of services that range from voice, data, wireless, and high-speed video at what we believe will be an appealing price range in an attempt to attract customers.

As to the benefits of cost savings and improved customer loyalty for carriers such as SBC, we remain skeptical. While it may be a bumpy ride for SBC investors, we believe consumers will be among the beneficiaries over the long term.

Q: Besides fiber, what changes do you see coming to telecom, and what companies might be on the leading edge?
A: We see the buildout of wireless-broadband networks increasing as we head into 2005. Among the carriers leading the wireless-broadband charge are Verizon and Sprint.

In addition, we think 2005 should look similar to late 2004, where telecom-service providers look to increase shareholder value by paying out large portions of their free cash flow in the form of dividends. In the second half of 2004, we've seen telecom carriers such as Alaska Communications (ALSK ) and Citizens Communications instituting what we view as sizable dividends, and we expect other carriers to follow this trend by returning cash to shareholders.