0982056396

U.S. Telecom Shares Poised to Rebound After Post-Election Slump
0982056396
By Hilary Johnson
Nov. 22 (Bloomberg) -- U.S. telecommunications stocks, losers since Democrats swept to power in Congress this month, are poised to bounce back as earnings prospects prove too attractive for investors to resist.
The industry is the Standard & Poor's 500 Index's best performer this year and is on pace to outperform the benchmark for the first time since at least 1990. Investors who fled the shares on concern that Democrats would block a federal overhaul of telecommunications rules may have sold too soon.
``We've had Democratic administrations before, and we've had Democratic Congresses, and we've still had phone companies and they still made money,'' said Timothy O'Brien, who manages the $450 million Evergreen Utility and Telecommunications Fund in Boston. ``Earnings growth ought to be very competitive with the broader market.''
O'Brien's fund owns shares of the two largest phone companies in the U.S., San Antonio-based AT&T Inc. and New York- based Verizon Communications Inc. They have fallen 4.5 percent and 1.1 percent, respectively, since the election.
A gauge of telecommunication stocks in the S&P 500 has lost 2.6 percent since Nov. 7 -- equal to 57 percent on an annualized basis -- when Democrats captured both houses of Congress for the first time since 1994. The S&P 500 has gained 1.4 percent in that period.
Investors speculated that AT&T's $78 billion purchase of BellSouth Corp. may be delayed and that a pending overhaul of phone laws might be canceled.
2006 Rally
The drop this month dented a rally that has lifted telephone stocks by 25 percent this year, six percentage points ahead of energy shares, the next-best performers in the S&P 500. AT&T has gained 34 percent; Verizon is up 21 percent.
The stocks had been rallying as analysts boosted estimates for profit growth. Telecommunication companies' earnings are forecast to increase 13.8 percent in the fourth quarter, up from an estimate of 12.2 percent at the end of September, according to Thomson Financial data. Overall, the S&P 500 will show fourth- quarter profit growth of 9.8 percent, Thomson said.
AT&T said last month that third-quarter earnings jumped 74 percent, helped by growth at its cellular unit, Cingular Wireless LLC. If its pending takeover of BellSouth Corp. clears legislative and regulatory approval, AT&T would get the 40 percent of Cingular it doesn't currently own.
Investors also were attracted to price-earnings ratios of about 17 for telephone stocks at the start of the year and dividend yields of around 3.3 percent, said Jeffrey Halpern, a telecommunications analyst at Sanford Bernstein in New York. Phone stocks have traded at about 37 times earnings, on average over the past five years, while the dividend yield was about double that of the S&P 500.
`Any Reasonable Venue'
Still, the Democratic victory spooked some investors.
Senator Daniel Inouye of Hawaii, the senior Democrat on the Senate's Commerce, Science and Transportation Committee, said last week that he wants more information on AT&T's BellSouth purchase. Representative John Dingell, the top Democrat on the House Energy and Commerce Committee, said the Justice Department ``handled the matter in too cursory a fashion'' when it approved the deal without conditions.
New telecommunications rules, which would eliminate local and state clearances for phone companies that want to sell video service, were part of a bill that stalled after the Senate failed to take it up this year. The new regulations would make it easier for phone companies to compete with cable-television operators.
The Democratic-led Energy and Commerce Committee will try again to overhaul telecommunications regulation ``in a responsible way,'' said Dingell, of Michigan.
``In any reasonable venue, the argument for allowing this to go through should stand,'' said Louis Cimino, an analyst at W.H. Reaves & Co., which manages $2.6 billion in Jersey City, New Jersey. ``Our expectation is that this agenda will still move forward.'' The firm's holdings include AT&T and Sprint Nextel Corp., the third-largest U.S. wireless services provider.
`Just Don't See It'
Verizon is in the process of building a $22.9 billion fiber- optic network to carry video and Internet to residences. It already offers the service in seven states. AT&T is spending $4.6 billion on its own network, and plans to be in 15 markets by the end of the year.
Some investors remain skeptical that telephone companies will be profitable enough to invest in, given the amount they have to spend to compete with Internet, cable and mobile-phone companies.
Malcolm Polley, chief investment officer at S&T Wealth Management in Indiana, Pennsylvania, which manages $1.3 billion, sold nearly all his holdings of Verizon after the company said costs for its video service, called FiOS, would shave as much as 32 cents from full-year earnings per share. The earlier estimate was as much as 30 cents.
``Our concern with Verizon specifically, and telecom in general, is really the same -- are they going to earn an adequate return on invested capital?'' Polley said. ``We just don't see it.'' He called the amount that Verizon is spending on fiber so far ``a drop in the bucket.''
Growing Market
With or without streamlined regulation, the market for new telecommunications services is growing. Annual broadband revenue in the U.S. is expected to nearly double to $33.4 billion in 2010, from $17 billion in 2005, according to Yankee Group, a Boston-based research firm.
The market for so-called Internet Protocol TV, part of what phone companies plan to provide to customers, is expected to increase to 11.9 million subscribers by 2010, up from 786,000 this year, Stamford, Connecticut-based Gartner Group said.
``People mistakenly perceive the Bell companies as nothing more than consumer telephone operators,'' said Sanford Bernstein's Halpern. ``They're wireless, they're wireline, they're consumer, they're business. They're not just companies who are in the battle of their lives with the cable industry.''