Telecom Growth Could Slow, But Won’t Stop, Analysts Say
After a Q1 telecom “rally,” steady growth should continue in the upcoming quarter, experts said this week. Slow, rather than explosive, growth will characterize Q2, analysts said. They term the market in a renewal phase, though some cautioned investors might be overvaluing carriers’ worth and growth potential after several years of undervaluing them.
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Investors with excessive expectations will be let down, but steady trends will bring “an improved comfort level” with expectations for cash flow, Bank of America (BoA) said this week. Q1’s overall upward trend wasn’t driven by a basic change for the better in carrier business models, but rather a sea change of market sentiment, BOA said, adding “we can’t help but sense that with the rally comes some expectation that it must have had a fundamental basis.” Wireline spinoffs by Sprint and Alltel will boost the RLEC market as much as 111%, BoA said, with the companies trading at “attractive implied” levels in Q1. Wireless remains the best value buy for stocks, BoA said, with Sprint, Alltel, Verizon Wireless, Leap and cell tower maker American Tower the sector’s “power plays.”
Investor expectations are playing a big role in share value sector-wide, Merrill Lynch said in an earnings preview for the upcoming quarter. Since the market reached an “underweight bottom” in Oct. 2005, expectations for U.S. telecom stocks have risen steadily and been followed by share prices, the report said. The bank warned against “overweight” expectations, however, saying antagonistic market fluctuations often follow such overvaluation. Merrill Lynch agreed that the wireless sector offers the most stability, with Sprint and Cingular “stable” investments and Verizon Wireless and T-Mobile operating strongly in their market segments.
Merrill Lynch rated Verizon a “buy,” since investors undervalue it out of fear of its high deployment costs. The carrier trades at a “discount” relative to its EBITDA, the bank said, and future directory divestitures could boost value. Any leveraging by Verizon in an attempt to buy out Vodafone’s stake in Verizon Wireless could be “marginally dilutive,” Merrill Lynch said, but would sharply improve the company’s earnings growth profile.
Another “really strong” quarter for phone companies’ DSL offerings is in the works, said Jupiter Research analyst Joe Laszlo. “The price differential with cable is really hitting home” for carriers trying to squeeze out ever more market share, he said. But cable firms will hit back with strong VoIP offerings, Laszlo said, and “it wouldn’t surprise me” at all if Time Warner and Comcast were both to beat Vonage in terms of telephone subscribers in the coming quarter or so.
“Telecom is getting hot again, both wireline and wireless,” analyst Jeff Kagan said: “We are watching telecom reinvent itself.” Despite hitting “a brick wall” in 2000, the industry has reconfigured itself and finally is ready to offer true bundled services on a broad scale, he said. As more devices are sold for these bundles, Kagan added, the industry will be forced to grow.