|
|
Get Four
|  | MARCH 7, 2005
Dialing Into Wireless Stocks As wireless builds momentum against wireline, S&P's Kenneth Leon points to the best companies in service and equipment Dominance in telecom is steadily shifting away from traditional wireline companies to wireless -- a trend that's affecting the market for telecom equipment as well, says Standard & Poor's analyst Kenneth Leon, who covers the wireless-services and -equipment companies. Growth in wireline is definitely slowing, he says, and many customers are using their wireless phones for long-distance calls while retaining a wireline connection for local service. Between 10% and 15% of the total market is now using wireless exclusively, Leon says. The leaders in wireless service, he adds, include Verizon Communications (VZ ), Sprint (FON ), and Cingular, a joint venture of BellSouth (BLS ) and SBC Communications (SBC ), and for international markets Vodafone (VOD ). On the equipment side Leon's top recommendation is Qualcomm (QCOM ), the leader in CDMA technology. These were some of the points Leon made in an investing chat presented Mar. 1 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff. Edited excerpts follow. AOL subscribers can find a complete transcript at keyword: BW Talk. Note: Kenneth Leon is an S&P Equity Research analyst. He has no ownership interest in or affiliation with any of the companies under discussion in this chat. All of the views expressed in this chat accurately reflect the analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this chat. For required disclosure information and price charts for all S&P STARS-ranked companies, go to spsecurities.com and click on "Investment Research" and then on "Required Disclosures & Standard & Poor's STARS vs. Closing Prices Charts." Q: Ken, what's the state of the telecom stocks generally in this volatile market? A: I cover both wireless-services and wireless-equipment stocks, and we currently have a neutral viewpoint on telecom wireless services, expecting increased competition over the next 12 months. Consolidation both in the U.S. and overseas may also have a negative impact on capital spending for wireless equipment. Q: What wireless-service companies look strongest now? A: There are five nationwide carriers in the U.S. market that control over 90% of total subscribers. We see Verizon Communications (VZ ); Cingular, owned by BellSouth (BLS ) and SBC, and Sprint (FON ), with its proposed merger with Nextel Communications (NXTL ), as best positioned in the U.S. market. We also like Vodafone (VOD ) for playing the international market. Q: Who looks best in wireless equipment these days? A: Our top recommendation is Qualcomm (QCOM ), which is the market leader for CDMA technology. This is the only company that enjoys pricing power in the industry. The company is well positioned with its intellectual property on CDMA, for which it gets paid royalties on chipsets and handsets that are shipped around the world. Because of the company's unique position, we see Qualcomm as similar to the position that Microsoft (MSFT ) enjoyed in the 1990s. We expect revenue growth greater than 20% with net margins near 35% in 2005. We also see strong free cash flow and cash at the end of the year approaching $9 billion with no debt. We see Qualcomm as a core position in a technology portfolio. With the recent weakness in equipment stocks, including Qualcomm, we would buy Qualcomm shares. Q: So does S&P rate QCOM a strong buy or a buy? A: We have it rated as a strong buy. It is also in S&P's Equity Research Top 10 Portfolio recommendations. Q: What other strong buys or buys do you have in your coverage area, Ken? Beyond QCOM. A: In the last few months we have pared down several names. QCOM is the only strong buy we have in our universe for equipment. We also have a strong buy on Cisco (CSCO ), which is covered by Ari Bensinger. In wireless services, we don't have any strong buys, but we do have buy recommendations on Sprint, Nextel Communications, and Nextel Partners (NXTP ). Q: Do you see any impact on your area from voice-over-Internet protocol (VoIP)? A: Again, from a wireless perspective, we're beginning to see wireless take on IP-based services -- for example, the network upgrades to third-generation platforms will allow wireless subscribers to be able to navigate the Web and send and receive e-mails and files. The services and features that you can get on a broadband wireline network are expected to be available on wireless networks in the next two years. Q: How are valuations now among the stocks you cover? A: Most of the wireless equipment group have corrected 15% this year, and we are seeing more reasonable valuations relative to their growth rate, but most of the stocks are still trading at a premium to the market. In the case of wireless services, we are seeing valuations either below or at the market level Q: So is this a good time to get into wireless services? A: We think one should be selective in the group and play a mix of domestic and international stocks. In the U.S., because there has been so much consolidation with mergers and acquisitions, we think the names we mentioned before are attractive. And outside the U.S., we think Vodafone has attractive valuation and a strong competitive position. Q: Do you see wireless becoming the dominant player, vs. wireline? A: It's already happening, and I was one of the first ones to cover wireless back in the '80s. As evidence of that statement, we're seeing acquisitions in wireless being sold at premiums, while we're seeing long-distance acquisitions coming at discounts. For most of the major telecom providers, not only in the U.S. but around the world, a key strategy from management is to grow wireless as a percentage of their total revenues. This seems to be the most relevant benchmark that investors are tracking for the growth outlook and value of these companies. Q: What about the wireless phones themselves? Who's the leader? And will we be seeing more and more bells and whistles? A: First of all, wireless handsets grew 33% in 2004 over 2003, and we're projecting handsets in terms of unit shipments to grow 10% in 2005. What's driving growth is new market penetration in emerging countries such as China, Southeast Asia, India, Latin America, and Eastern Europe, as well as a high replacement cycle for handsets in developed markets like Japan, Korea, Western Europe, and North America.
BW MALL
SPONSORED LINKS
Buy a link now! | | |
 Copyright 2005, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
