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|  | NOVEMBER 30, 2004
Telecom Services' Wide Appeal S&P's Todd Rosenbluth says many players are cash-healthy and should benefit from the buildout of wireless-broadband networks What's the only sector Standard & Poor's currently has an overweight recommendation on? Answer: telecom services. That group has been outperforming the market so far in 2004, says Todd Rosenbluth, a Standard & Poor's analyst who covers these stocks. Rosenbluth has several strong buys in telecom services and related companies -- Verizon (VZ ), BCE (BCE ), CenturyTel (CTL ), Alltel (AT ), and Amdocs (DOX ). S&P also lists as strong buys Nextel Communications (NXTL ), Nextel Partners (NXTP ), Qualcomm (QCOM ), and Motorola (MOT ). Rosenbluth says the factors favoring such stocks include significant free cash flow to support capital spending and dividends, and in some cases, advantages resulting from competition among wireline, wireless, and cable-service providers. Although wireline service continues to lose ground to wireless, the dominant players in wireless are also wireline companies, which reduces their risk, Rosenbluth says. He notes that the three largest wireless providers in the U.S. are Cingular, owned jointly by BellSouth (BLS ) and SBC Communications (SBC ); Verizon Wireless, owned jointly by Verizon and Vodafone (VOD ), and Sprint PCS (PCS ), owned by Sprint (FON ). These were among the points Rosenbluth made in an investing chat presented Nov. 23 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and from Jack Dierdorff of BW Online. Following are edited excerpts from this chat. AOL subscribers can find a full transcript at keyword: BW Talk. Todd Rosenbluth is a Standard & Poor's Equity Research Services 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 analyst's 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: Todd, the broad market had a very nice post-election run-up but is sort of resting now. How have the telecom stocks fared in these recent days? A: The integrated telecom stocks that I primarily follow are up nearly 6% in the last 13 weeks. (as of Nov. 19), modestly underperforming the S&P 500. Thus far in 2004, telecom services stocks have been outperformers, and we continue to recommend investors overweight the telecom services portion of their portfolios. Q: What are your top five picks? A: The strong buy recommendations from S&P in telecom services and related space, in no particular order, include Verizon, BCE, CenturyTel, Alltel, and Amdocs. I follow all five of these stocks for Standard & Poor's. However, my colleagues have telecom stocks Nextel Communications, Nextel Partners, Qualcomm, and Motorola ranked as strong buys. Q: Is there any common thread among those stocks making them attractive? A: Yes, there are two threads that can be pulled together. On the pure telecom-services side, we favor stocks that are generating significant free cash flow to fund capital expenditures and also support relatively strong dividend payouts. Among the stocks in this group are Alltel, Verizon, and BCE. The telecom-related stocks that I mentioned, such as Amdocs, Qualcomm, and Motorola, to name just a few, we believe will be beneficiaries of the competitive environment from wireline, wireless, and cable-service providers. Q: Anything new happening with the trend to fiber? Your thoughts on Corning (GLW )? A: My colleague follows Corning shares and has a hold recommendation on the stock, based largely on discounted cash-flow and book-value metrics. We at S&P expect Corning to benefit over the long term from accelerated fiber-to-the-home deployments by telecom operators. In recent weeks, we've heard added insight on the strategy to deploy fiber from both Verizon and SBC Communications. Q: Your opinion of Nextel? A: We have a strong buy, or 5 STARS [STARS is S&P's Stock Appreciation Ranking System], on Nextel Communications. We believe the stock is attractively priced relative to its peers. We view favorably Nextel's spectrum agreement announced earlier in November and believe the company's strong brand name has helped to keep its customer turnover at the low end of its national carrier peers. Q: What about SBC? A: We have a sell recommendation on SBC Communications. We believe it faces multiple challenges in its wireline and wireless operations that will prevent the company from improving its below-average EBITDA [earnings before interest, taxes, depreciation, and amortization] margins in the near term. Despite a relatively high dividend yield, we believe there are more attractive investment alternatives in the telecom space.
BW MALL
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