Telecom
Survivors Offer Top Value
by Patrick McKeough, editor
Wall Street Stock Forecaster
Beckman
Coulter (NYSE BEC) slumped deeply on a mild business setback
because investors fear it faces the same problems as troubled
drug and biotech companies. Similar `guilt-by-association' has
also had an impact on the telecom industry.
Accounting scandals
at WorldCom and Qwest, plus meltdowns at telecom suppliers Lucent
and Nortel, have soured investors on the telecom group.
Even well established
companies with untainted accounting, like Verizon and Alltel,
fell to multi-year lows. However, Verizon and Alltel own dominant
local phone franchises that will help them survive current industry
turmoil, and provide profits to invest in growth areas like wireless
and long distance.
Verizon Communications
(NYSE VZ $37; WSSF Rating: Average) was formed in June 2000
by the merger of GTE Corp. and Bell Atlantic. It's the largest
phone company in the U.S. with 135 million customer lines in
31 states, or about a third of the nation's households. Its 55%-owned
wireless unit, Verizon Wireless, has over 30 million customers
in all 50 states. The company also has operations in 45 foreign
countries, and is a major publisher of print and online directories.
Verizon's revenues
grew from $64.7 billion in 2000 to $67.2 billion in 2001. Profits
before one-time costs rose from $8.1 billion or $2.92 a share
in 2000, to $8.4 billion or $3.00 a share in 2001.
In the first half of
2002, Verizon earned $4.1 billion or $1.49 a share, virtually
unchanged from a year earlier. Revenues slipped to $33.2 billion
from $33.6 billion, due to weak consumer demand for wireless
and Internet services. Verizon added 909,000 wireless subscribers
in the first six months of 2002, but that's 31% below a year
earlier.
Investor unease with
telecommunication stocks has forced Verizon to postpone a public
offering in Verizon Wireless. The delay could hinder Verizon's
ability to pay up to $20 billion in cash and stock to UK-based
Vodafone, its minority partner in the wireless unit, which can
force Verizon to buy back most of its stake in the venture between
2003 and 2007.
Demand for new digital
subscriber lines (DSL) for high-speed Internet access was flat
in the first half of 2002. Since the technology lets customers
talk on the phone while connected to the Internet, strong DSL
growth in the last two years has cut consumer demand for second
phone lines.
Since the June 2000
merger, long distance customers have more than doubled from 4.1
million to 9 million. Verizon is now the fourth-largest long
distance provider in the U.S. It has customers in 44 states and
serves 80% of its local phone customers.
Verizon is selling non-core assets like phone lines and investments in foreign phone companies to raise cash for debt reduction. It aims to cut debt from $64.3 billion at year-end 2001 to $56 billion this year. The stock now trades for 12.2 times the $3.04 a share it should earn in 2002. The $1.54 dividend yields 4.2%.
Verizon is a buy.
ALLTELL Corp. (NYSE AT $47; WSSF Rating: Average) provides local, long distance, wireless and Internet access services to 12 million customers in 26 states but mainly in rural areas. It also provides consulting and information management services to telecommunication companies and financial institutions in 55 countries. The business services unit supplied 17% of Alltel's revenues in 2001.
In the last five years, Alltel's revenues more than doubled, from $3.2 billion in 1997 to $7.6 billion in 2001, mainly due to its $4 billion acquisition of Sprint's wireless operations in 1998. Profits before non-recurring items jumped from $399.7 million or $2.12 a share in 1997 to $856.7 million or $2.70 a share in 2000. Profits dipped to $837.5 million or $2.67 a share in 2001.
In the first half of 2002, Alltel earned $486.9 million or $1.56 a share before one-time items, up 14.8% from $424.1 million or $1.35 a share a year earlier. Revenues crept up to $3.76 billion from $3.73 billion. Most of the higher profits came from its wireless division, although subscriber growth fell 28% from a year earlier. Alltel's strategy of bundling its long distance, wireless and Internet services helps build customer loyalty despite competition.
In July 2002, Alltel completed two major acquisitions. It paid $1.9 billion for Verizon's local telephone assets in Kentucky. The deal added 600,000 customers, and increased its local phone lines by 25% to 3 million.
Alltel also bought the wireless operations of CenturyTel for $1.57 billion. The purchase added 700,000 wireless customers in six states. Alltel now has over 7.5 million wireless customers, and controls about 13% of the markets it serves. The deal also included CenturyTel's minority interests in other cellular partnership that reach 1.8 million more potential customers.
The company financed the acquisitions with $3.5 billion in new debt, including $1.34 billion worth of publicly traded equity units that consist of a note plus a contract that requires the holder to buy $50 worth of new Alltel common stock for cash in three years, somewhere between $49.50 and $60.39 a share.
Alltel's long-term debt is now 1.1 times equity, up from 0.7 times at the end of 2001. Alltel's steady cash flow from its local service operations should help it pay down the extra debt.
The stock peaked at $92 in 1999, but fell steadily to $35 last July, its lowest level in five years. Some of that drop was due to concerns over the dilutive effect of the new equity units. It now trades for 14.8 times the $3.18 a share it will probably make this year. The $1.36 dividend yields 2.9%.
Editor's Note: Patrick McKeough is editor of Wall Street Stock Forecaster, 250 Liston Rd., Ste. 700, Buffalo, NY 14223, 1 year, 12 issues, $99. Wall Street Forecaster is a 3-part investment advisory. It encompasses the monthly bulletin; the weekly (48 or more times per year) phone/email Hotline message and the monthly investment-planning supplement, The Wall Street Stock Portfolios.
