The Sound of Phone Cords Severing


By Todd Rosenbluth We at Standard & Poor's continue to recommend that investors underweight telecommunications-services stocks, following a study about number portability. We believe the results of an S&P Equity Research/Insight Express nationwide study suggest that recent number-portability rules will lead to greater cellular substitution for wireline carriers.

The survey of 500 consumers was commissioned by Standard & Poor's in the last week of November. Nearly 10% of current wireline customers responded that they would take their fixed-line number to a mobile-phone operator based on new rules allowing this. The figure is more than double the percentage of people that have actually cut the cord during the last two years.

The results also suggest that the prevailing assumption -- that aggressive bundling of data services with traditional services would ensure consumer loyalty to one telecom provider -- is questionable. We believe that loyalty to one's carrier may be challenged as consumers turn to price and convenience.

LOW LOYALTY. We also found no significant difference in respondents' intentions to stick with current wireline providers between those who receive traditional services only, like local and long-distance, and those that have additional services, like DSL.

Based on the survey, we expect access-line losses to rise in 2004. We also see higher advertising and retention costs, since customer loyalty doesn't appear to improve with expanded service bundles.

Telecom-services stocks have lagged behind the market this year. The S&P Integrated Telecommunications Services stock index has fallen 9.2% so far this year through Dec. 5, vs. a 20.6% gain for the broader S&P 500-stock index.

BELLSOUTH BLUES. We continue to recommend that investors sell Cincinnati Bell (CBB

; recent price: $5.20) and avoid SBC Communications (SBC

; $24.60) and Sprint (FON

; $15.20).

On Dec. 11, we downgraded our ranking on shares of BellSouth (BLS

; $27) to 2 STARS (avoid), from 3 STARS (hold). Based on S&P's number portability study, we believe BellSouth will face sizable challenges in 2004. Like most of its wireline peers, it will likely suffer continued access-line losses as more customers cut the cord.

In addition, we expect increased marketing and retention spending by BellSouth, as well as competitive threats from wholesale access and cable companies. Given the operational risks we see for BellSouth and based on our relative and discounted cash-flow-valuation analyses, we think the stock is unappealing. We have a 12-month target price of $24 on on BellSouth shares. Analyst Rosenbluth follows telecommunications-services stocks for Standard & Poor's


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