The whisper on Wall Street is turning into a roar.
Suddenly, telecom stocks are “hot” again, springing back to life in recent weeks following a painful and prolonged two-year slump.
Telecom stocks-Wall Street darlings during the early 1990s-had been taking something of a beating the past few years as huge telco investments in licenses, infrastructure and marketing and a flood of new competitors, services and technologies cut deeply into many once high-flying companies’ bottom lines-and clouded future earnings projections.
“The past couple of years have been frustrating for a lot of telecom investors,” said one financial analyst. “While the Dow set record after record, many telecom companies were not participating in the rally. After watching share prices remain flat-or in some cases, plummet-a lot of investors soured on the sector and decided to turn their attention elsewhere.”
But in recent months, analysts and investors alike seem to have rediscovered their taste for telecom. Suddenly, telecom stocks are regaining their Wall Street luster and muscling their way toward the front of the pack in Wall Street’s unprecedented bull run.
During the past 10 weeks, RCR’s index of 80-plus key telecom stocks has leapt nearly 200 points-or 15 percent. An increasing number of telecom companies have seen meteoric increases in the price of their stock in recent days. As of June 25, 28 RCR index companies were trading within 10 percent of 52-week highs while only five were hovering within 10 percent of 52-week lows. As of late last week, seven RCR index telcos were trading at 52-week highs.
On June 23, for example, a day when the Dow Jones Industrial Average took a nose dive of nearly 200 points, Geotek Communications Inc.-after announcing an alliance with IBM Corp.-saw its stock soar in value by nearly 30 percent. And industry heavyweight Motorola Inc., until recently referred to as “hi-tech’s fallen star,” has rebounded nicely from a mid-1990s slump and was trading late last week at $76.75 per share, an all-time high.
Another sign of telecom’s resurgence: Financial buyers have begun targeting certain cellular sectors, snapping up “undervalued” telecom properties with relatively low price-to-earnings ratios and increasingly positive cash flows that make their current stock prices appear to be bargains. New York investment firm Blackstone Capital Partners’ $718 million merger agreement with CommNet Cellular Inc. is the most recent example of this trend. (CommNet stock rose 15 percent following the merger announcement.)
Even President Clinton is getting into the act, singling out the telecom industry for praise in a June 19 pre-Summit of the Eight speech in Denver-delivered outside the headquarters of Tele-Communications Inc.
Global deregulation also has sparked the industry, allowing aggressive telecom companies to tap vast new markets, fueling innovation and prompting strategic alliances and mergers that are driving cellular’s cost to the consumer down while pushing the technological envelope to greater and greater heights. (That Dick Tracy wristwatch doesn’t look so futuristic anymore, does it?)
Meanwhile, it’s difficult to read a newspaper, listen to the radio or watch television without being bombarded with pitches for cheap paging, cellular and personal communications services. While the early 1990s were boom years in terms of subscriber growth, the rate of overall cellular penetration during 1995 and 1996 slowed somewhat-a trend that analysts say contributed to telecom’s negative turnabout on Wall Street.
The 1996 telecom act helped kick cellular’s growth rate back into a higher gear and the total number of cellular users worldwide now is approaching the 100-million mark. Many analysts are forecasting 200 million subscribers by 2000 and an eventual overall worldwide cellular penetration rate of 40 percent-predictions, if true, that likely will translate into higher profits for the telcos and greater returns for investors.
But the telecom horizon, while noticeably brighter in recent days, is far from cloud-free-a situation that, analysts say, continues to keep many potential investors on the sidelines. While generally optimistic about telecom’s short- and long-term future, analysts warn that a number of potential problems could throw a wet blanket over the current party. Among the issues generating the most concern: the financial instability of many C-block licensees, which has sullied the early success of the Federal Communication Commission’s spectrum auctions and the continuing evolution of PCS; unresolved health-related questions centering around whether there are potentially damaging effects of microwave radiation; and deregulation, which, while spurring competition and lower consumer prices, also has helped to create a general air of confusion in the consumer marketplace, as would-be cellular users are blitzed with a mind-numbing array of new choices-“turning many potential subscribers off before they have a chance to be turned on,” said one analyst.
“What we’ve seen [during the past few years] is a lot of confusion among investors about what’s going on in telecom,” said Perry Walter, an analyst with The Robinson-Humphrey Co. “But just in the past month, that confusion has turned into interest, especially in light of the recent merger and acquisition activity we’ve been seeing.”
Walter’s telecom outlook is markedly upbeat. His top wireless stock picks: “Western Wireless-a company with strong management and cash flow that has been doing a good overall job of rolling out their network; InterCel Inc.-another company with strong management doing a good job of growing their PCS subscriber base; and Rural Cellular Corp.-creative rural cellular players in Minnesota and Maine with strong roaming revenues and some promising PCS partnerships with Aerial Communications.”
Bear Stearns Technology Group analyst David Freedman is also bullish: “After moving sideways to down for more than three years, the stocks of wireless telephony companies seem likely to enjoy positive performance in 1997 and 1998. By late 1997 or early 1998, we expect evidence to accumulate that supports our hypothesis that incremental penetration is accelerating and that the pricing level is not dropping dramatically. Consequently, we believe that investors will soon begin to consider the rapidly growing cash flow and earnings of cellular companies.”
Freedman’s top stock pick is 360
