| BUSINESSWEEK ONLINE : APRIL 12, 1999 ISSUE | ||||||||
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| COVER STORY
For Investors, It's Not too Late to Dial SBC Despite its transformation into a global telecom player, its stock hasn't caught up yet Should you eat the shark or just munch on the bait? That's the question Baby Bell investors are asking themselves as the competitive landscape in telecommunications continues to change. Where there were seven regional Bell operating companies (RBOCs) at the time of the AT&T breakup, there are now four, and there could be fewer two years from now. Does it make more sense to buy shares in the smaller RBOCs, such as BellSouth (BLS) or U S West (USW), or should you go for the Great White of the bunch, SBC Communications (SBC)? Right now, SBC is a tantalizing stock. It closed on Apr. 1 at $49, which gives it a price-to-earnings ratio for 1999 of 20.5. That's a bargain for a company that has averaged annual earnings growth of 20% for the past five years. "It's our estimation that SBC is undervalued," says Rex Mitchell, an analyst with NationsBanc Montgomery Securities in San Francisco. "They are growing just as fast as anyone in the telecommunications sector, but their stock is much cheaper." This is true despite the ability of CEO Ed Whitacre and his team to squeeze more earnings out of local calling services than any other Baby Bell. Bell Atlantic (BEL), SBC's largest competitor, earns about one-third less from its local business than does SBC. It might not be fair to compare SBC to the other RBOCs much longer though. "Soon, a better comparison might be to MCI WorldCom (WCOM) or AT&T (T)," says Lehman Brothers analyst Blake Bath, who raised his rating to a strong buy on SBC on Apr. 1. "This company is getting a larger share of its revenue from data and consumer high-speed traffic than it ever did before, and it will soon be in the long-distance market also." QUID PRO QUO. The key to SBC's near-term stock performance, however, is not if it becomes a player in the long-distance market, but when. While the Justice Dept. has approved SBC's merger with sibling Ameritech, the Federal Communications Commission will have the final say. For SBC to get FCC approval, it has to make significant progress in opening its local markets to competition. If it does, the FCC will allow SBC to enter the long-distance market sooner rather than later. The Ameritech merger has some investors salivating because of the presumed efficiencies the merged company will gain. When SBC bought Pacific Telesis two years ago, it was able to raise that company's earnings by 39%, via superior marketing techniques -- and wholesale layoffs. By aggressively marketing such high-margin services as call waiting and conference calling to existing customers, SBC improved overall margins. Most analysts think it can do the same with Ameritech. That company already squeezes plenty of productivity out of its workers (it has the lowest number of employees per 10,000 lines of any Baby Bell), but its marketing machine has been far less effective than SBC's. SBC has other things going its way, too. Right now, the high-profit data-traffic business accounts for only 10% of SBC's revenue. But 30% of the company's revenue growth comes from data traffic. And Lehman's Bath estimates that it could account for one-third of all revenue and nearly all revenue growth within three years. Wireless traffic is also a major growth area for SBC, which should be much more competitive in that market after the Ameritech merger. At that point, SBC will have a national network with which to compete against AT&T. Another significant source of growth could be the high-speed DSL Internet access service that SBC is rolling out aggressively. "They are getting 1,000 new customers a week on the consumer side alone, and that number should grow to 5,000 a week at the end of the year," predicts Bath. THE FINAL WORD. DSL service is also a winner because of its relatively low infrastructure costs. "All they have to do is give the customer a modem and put in a new device at the central station," says Merrill Lynch analyst Dan Reingold. "It is not capital-intensive, and it is already enjoying a high success rate, which makes me think that it should start showing up on the bottom line pretty soon." The next 12 months should be exciting for SBC shareholders. Regulatory reviews in Ohio (due in two weeks) and Illinois (due by June), will hint at SBC's long-distance strategy. The FCC ruling, expected by July, should be the final word on whether the Ameritech merger will fly. In addition, analysts expect that at least one RBOC, possibly SBC, will get approval to enter the long-distance market before 2000. "All SBC has to do is deliver consistent earnings growth over the next four quarters, and this stock should do well," says Merrill's Reingold. "That shouldn't be a problem because they haven't had trouble doing it in the past." By Sam Jaffe in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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