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| How low can telecommunications stocks go? That has been an oft-asked question for the past year. Witness the exchange-traded index funds, which hold a basket of stocks designed to reflect sector performance. Merrill Lynch's Broadband Holders (BDH
), which has big chunks of Lucent (LU
), Nortel (NT
), and JDS Uniphase (JDSU
), is down about 70% on the year.
Similarly, shares of Merrill's Telecom Holders (TTH
) are down more than 50%. No less than John Chambers, CEO of router kingpin Cisco Systems (CSCO
), has pronounced that we're in the grip of a global recession. Everyone is overbuilt, overpriced, and underfunded -- at least for now. Is there any good news?
Well, maybe a little. Analysts expect a little sunshine to break through telecom's dark clouds in a few areas later this year. The most promising is handheld devices, ranging from cell-phone handsets to personal digital assistants to next-generation pagers that enable real-time text communication. Companies big in the latter area include Motorola (MOT
) and Research In Motion (RIMM
). According to Paul Sagawa, a telecom analyst with Sanford Bernstein, these telecoms look less wobbly than others because they represent a new vein of technology -- one that more and more corporations are likely to adopt. And it doesn't hurt, he says, that handset leader Nokia (NOK
) is widely regarded as a superbly managed company.
PHONES KEEP RINGING. The Baby Bells are another likely growth area. While they've been busy merging over the past few years, all retain their reliably profitable, virtually recession-proof monopoly business: local phone service. No one turns off their phone when times are bad. Of the pack, SBC (SBC
) and Verizon (VZ
) look set to shine the brightest. Both companies remain largely insulated from competition in local service, where they still make more than 50% of their profits. SBC is rapidly pushing into broadband and could dominate a large chunk of that market.
Verizon is turning into a powerhouse wireless player and is even contemplating a spin-off of it mobile-phone business. Then there's Cingular, SBC's mobile-phone subsidiary, which is only a year or so away from providing third-generation service that should provide fast data -- and new opportunities to pull in cash from handset services (click here to see Investec Asset Management's Seth Kirkham on a safer way to play wireless).
Over the long haul, the optical sector also could offer good value, as telecom companies outgrow their existing networks and turn once again to Lucent, Nortel, Alcatel (ALA
), and other gearmakers for help. But for now, a dramatic overcapacity in the telecom market will leave even hotshot optical players hanging on.
Even so, they're in better shape than the long-distance companies, such as AT&T (T
) and WorldCom (WCOM
). As competition has intensified, profits in the long-distance business have eroded far faster than the companies expected. That means less cash for the big telcoms to build networks and less money for everyone from Juniper Networks (JNPR
), which makes massive data routers, to Lucent and Nortel, which make switching gear for the backbone networks.
NEWCOMERS' ADVANTAGE. In fact, analysts warn that any outfit with a voice-dominated business that isn't a local monopoly should start examining their options closely. Voice is a dead business as more voice-over-Internet protocol products shift voice traffic into the data stream, away from the specialized switching gear. And even the market for transmitting data has entered the realm of commodity plays, signaling cutthroat competition and declining margins.
Alas, much of the old guard is still stuck with antiquated gear that can't provide the services for which data customers will pay extra. That means relative newcomers with more advanced networks, such as Qwest (Q
) and Level 3 Communications (LVLT
), look to be in far better shape. Smart investors will survey the telecom scene closely. Not all the news is bad. |
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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