U.S. carriers may say they’re swimming through the current rough economic waters un-affected, but one factor keeping them afloat is the continued support from investors. While they might not be in danger anytime soon, ratings and investor recommendations have become increasingly more negative, putting a few waves in the carriers’ leisurely swim.
Not surprising to most, Moody’s Investor service recently downgraded Sprint Nextel Corp.’s debt rating to “junk” status, moving the carrier from a “Ba2” to “Baa3” rating. Moody’s also relayed an overall negative outlook for the carrier. Shortly after this rating, Sprint Nextel’s shares dropped more than 11%.
Walter Piecyk, of Pali Research, also sees some sharks in the water closely approaching the troubled carrier.
“Sprint operates in a highly competitive industry that is reaching market saturation and is subject to rapid technological change,” Piecyk said. “Sprint does not use what we believe to be global technology standards, which elevates its technology risk. Sprint’s competitors are able to bundle multiple services to customers and have higher margins and stronger financial positions that could enable them to fare better in a more aggressive pricing environment. We see no clear plan for Sprint to reverse the decline in its customer base.”
Wireline overhang
But Sprint Nextel might not be alone in its fiscal predicament. Shortly after the industry’s No. 3 carrier was downgraded by Moody’s, Goldman Sachs issued a similar report, although not as dismal, for AT&T Inc. and Verizon Communications Inc., parent companies to the nation’s two largest wireless players. Goldman Sachs said it was no longer recommending that investors “buy” into AT&T, downgrading its rating to “neutral.” Goldman Sachs also lowered estimates for 2009 earnings for AT&T and Verizon.
However, these companies’ lower ratings are not necessarily caused by any wireless impact. In fact, the wireless sectors may be doing just the opposite for companies.
“Verizon and AT&T are still the parent companies that run a landline business,” said Bill Ho, analyst with Current Analysis. “Landline carriers have been under attack and losses have mounted for a while. It’s the wireless business entities that are offsetting losses.”
The Dell’Oro Group is in the same boat. In one of its recent reports, the company predicts that 2009 will be tough year for the wireline market and expects that operators will focus their 2009 budgets on reducing expenses in anticipation of weaker demand.
“Many of the trends that have been affecting the market are being compounded by the poor economic environment and by the recent financial market collapse,” said Greg Collins, VP at Dell’Oro. “Wireline service providers continue to be challenged by cable and wireless network operators offering basic voice services.”
Wireless pressured
Mike McCormack, CFA at J.P. Morgan, said his firm is lowering its net add estimate for AT&T Mobility, Verizon Wireless and Sprint Nextel. “While wireless may be less economically sensitive, it is by no means immune,” McCormack said.
The firm cut AT&T Mobility’s fourth quarter net add estimate by 700,000 customers and while they said sales of Apple Inc.’s iPhone will remain strong, they expect a sequential decline.
“Further, we believe consumer appetite for higher-priced integrated ‘smart’ devices has been meaningfully impacted by economic weakness,” McCormack noted.
J.P. Morgan changed its previous fourth-quarter prediction that Sprint Nextel would lose 1.1 million customers and now expects that number to be closer to 1.25 million customers lost and expects the carrier to lose 3.2 million customers for the year. Further, the company raised its estimates on Verizon Wireless’ postpaid net adds, but lowered total adds and net additions for the year from 7 million to 6.7 million, including the 1.3 customers the carrier’s set to gain from acquiring Alltel Communications L.L.C.
Good news for regionals
More investment might be in store for smaller carriers, however. In late November RBC Capital Markets upgraded MetroPCS Communications Inc.’s stoc to “outperform” instead of just “sector perform” saying that the carrier may withstand or even benefit from the weakening economy as customers are on the hunt for less expensive wireless service.
A few months ago, Moody’s placed U.S. Cellular Corp and Leap Wireless International Inc. in good standings, saying U.S. Cellular maintains strong regional wireless network coverage with a relatively strong free cash flow while Leap received a stable outlook with a “very good” liquidity position. Further, in early December Stanford Research upgraded its rating of Leap from “hold” to “buy.”
