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SECTOR SCOPE by James A. Anderson March 1, 1999

Fewer Cellular Stocks, but Plenty Left Are Worth Calling
While industry consolidation is making pure plays scarce, that doesn't mean investors have no hope

Itís easy to see why investors eager to get in on the mobile-phone industryís growth spurt might be a bit frustrated: Business is booming, but consolidation within the sector is reducing the number of pure-play cell-phone stocks at a rapid rate.

Itís no consolation that there probably hasnít been a better time to invest in wireless, whether cellular or personal communications services (PCS) -- which is often labeled the industryís next generation. Thanks partly to discount calling plans such as AT&Tís One-Rate, subscriber growth is zipping along at 20% a year and may continue to at that rate for some years, analysts say. By some estimates, the number of mobile-phone users, now almost 70 million, will jump 43%, to 100 million, by 2000. Want proof? Stroll down to the local AT&T (T) outlet and count how many customers are walking out with the complimentary Nokia (NOK.A) phones they get after signing up for Ma Bell's cellular service. Telecomís Goliath reports that it's signing up 100,000 new customers per month for wireless service.

The droves of new subscribers have more than offset the effect of rate discounting so far. According to Standard & Poorís estimates, industry revenues are on track to rise from last year's $33 billion to $47 billion this year, even though average monthly revenues per cell-phone subscriber may fall 10%.

SWALLOWED WHOLE. The biggest problem for investors looking to tap into the boom is that a lot of big telecom players have gotten there first. Baby Bells such as SBC Communications (SBC), Bell South (BLS), and Bell Atlantic (BEL) see wireless' double-digit revenue gains as the perfect tonic for the low-single-digit growth of their traditional land-line businesses. Even AT&T leans on wireless as a key part of its strategy to again dominate all of telecom. Little wonder, then, that the number of cell-phone stocks has dwindled as industry giants have scarfed up wireless operators. Britainís Vodafone (VOD) took out Airtouch (ATI) with a $60 billion merger this January. And last fall, AT&T (T) bagged Vanguard Cellular (VCELA), an East Coast operator.

Merger headlines aside, plenty of pure-play mobile-phone stocks are left. True, to get a crack at AT&Tís cellular operations you have to be willing to live with the fact that wireless revenues make up 11% or so of the companyís total. Currently, with the company garnering a "strong buy" or "buy" rating from 18 of the 26 analysts who follow it on Wall Street according to a Zacks Investment Research survey, thatís an easy compromise to make. Still lots of other players are worth considering.

The key right now, analysts say, is to focus on either the high or low end of the market, the two camps into which the group is now split. The high end includes large nationwide carriers such as Sprint PCS or Nextel (NXTL), which are looking to further flesh out their networks. The bigger your footprint, as geographic coverage is called in the industry, the greater your economies of scale, and the less you have to pay out in roaming charges, fees the sectorís big names pay to outlying carriers to handle traffic whenever subscribers stray beyond the reach of their base network. Analyst Jennifer A. Murtaugh of Everen Securities says roaming charges can range as high as 40 cents a call, no mean sum when you consider that cell calls in fixed-rate pricing programs are billed at 10 to 15 cents a minute.

GIRTH'S LEVERAGE. "Weíre likely to see consolidation be a major theme in the group for the next year or two," says Robin P. Lochner, analyst with Deutsche Bank. "The only way to economically play catch up with AT&Tís One-Rate plan is to have a lot of facilities so you donít have to pay roaming fees." Thereís another advantage of size, says Lochner: the leverage girth brings. "The larger your scale, the bigger your footprint, the more customers youíre likely to have -- all of which help you get better pricing from equipment suppliers."

Of the nationwide pure plays, Sprint PCS (PCS), recently spun off from its long-distance parent of the same name, has quickly become a Wall Street favorite, with 6 of the 7 Wall Street analysts who follow the new wireless stand-alone as a "strong buy" or "buy." Due to a massive outlay to get its network up, Sprint probably wonít report positive earnings for the next few years and for the time being will be measured by cash flow per share, much like cable operators are. The company has won the Street over, however, with its aggressive campaign to sign up customers -- and a jaw-dropping 836,000 new subscribers brought on in the fourth quarter of 1998. During the same period, AT&T signed up 445,000. Sprint PCS is "pretty much the same story as AT&T, but in a stand-alone stock," says Philip D. Wohl, analyst for Standard & Poorís. Wohl expects the company's subscriber rolls and cash flow to grow an annual average 20% to 25% over the next few years. He holds a $40 a share price target for the stock, a 25% premium over its current price of $32.

One regional play that warrants a look is Western Wireless (WWCA), a carrier with extensive cellular and PCS coverage west of the Mississippi. Western plans to separate its two divisions by distributing a new shares in its cellular operations, a sign that the company might be interested in selling off one or the other to an outside bidder, says Deutsche Bankís Lochner. In fact, he points out, Westernís rural cellular assets would be a good fit with SBC or AT&T, which operate on a similar cellular technological standard. Even if the companyís parts donít attract suitors, Lochner looks for Western's combined cellular and PCS subscriber base to grow 24% annually.

Another plus: By controlling remote markets in the American West, Western has seen the roaming charges it collects rocket 85% in the last year. Western is currently rated a "strong buy" or "buy" by 14 of the 15 analysts that follow the company, according to Zacks. Everenís Murtaugh currently holds a $32 a share 12-month price target on Western and a $38 target for an 18-month horizon. Western shares closed last week at $27.06.

MAXED-OUT NETWORKS. If youíre looking for a contrarian pick, Orbitex fund manager Craig Ellis says Northeast carrier Omnipoint (OMPT) might be for you. One reason: National subscribers such as AT&T and Sprint PCS have signed up new customers at such a fast rate that their networks are overtaxed. "Some of the more aggressive promotions are overloading networks, although the big players donít want to talk about it," says Ellis. "One complaint AT&T customers have is that they run across a lot of business signals, tone outs, or cases when they canít reach an operator." Thatís why Ellis expects Omnipoint to pick up enough overflow over the next year to fuel a 25% subscription growth rate.

"Thereís a rotation in the industry, and we often find the company with the worst growth often catches the overflow," adds Ellis. Omnipoint, rated "strong buy" or "buy" by 13 of the 19 analysts that follow the company, according to Zacks, also could also be a takeover target. At a current price of $11.81, Omnipoint is well off its 52-week high of $30. But Ellis says Omnipoint could retrace its fall and hit a price target of $25.

One pick for fund investors is Ellisí Orbitex Info-Tech Communications Fund (OITAX), which had a total return of 52.18% last year and so far is up 18.43% this year through Feb. 25. Ellis says cellular currently makes up 7% of the fundís assets.

James Anderson, who teaches journalism for the City University of New York, writes Sector Scope every other week for Business Week Online

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