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DECEMBER 12, 2003
"Tread Carefully" in Telecom Stocks [Page 2 of 2] Q: What about Global Crossing? They should emerge soon. A: We do not follow Global Crossing, as they are still in bankruptcy proceedings. However, we follow one of its peers, Level 3 Communications (LVLT ). We have a sell recommendation on LVLT shares. Given the pricing pressures on both its telecom and software segments, we don't see Level 3 reaching profitability in the near term. Given its relatively high valuation, we would sell LVLT shares. Q: Any update on Telephone & Data Systems (TDS )? They seem undervalued, given everything they own. A: We have a hold opinion on TDS. We have a 12-month target price of $68. However, TDS is a majority owner of shares in U.S. Cellular (USM ). USM is an accumulate-recommended stock, given EPS [earnings per share] growth and relative valuation analysis. Q: What's your feeling on Nokia (NOK )? A: Nokia, which we classify as a technology stock, is a buy-recommended opinion of one of my colleagues. We expect TDMA handset market share gains to be a key growth driver for NOK. Given the company's dominant market share and our view of superb execution, S&P recommends investors buy NOK shares. Q: What's your opinion on Comverse Technology (CMVT )? A: CMVT, one of our technology stocks, is an accumulate recommendation. We believe CMVT has benefited from strong demand for its wireless products. With the shares trading below peers, in our opinion, we would add to positions in CMVT. Q: Has Sprint PCS (PCS ) any chance of recovery? A: We have a hold on Sprint PCS but see losses in 2003 and 2004. We believe the company needs to do a better job integrating with its brother stock Sprint FON. We have an avoid on Sprint FON shares, believing that pressure in its local and long-distance markets make the stock unattractive. Q: The other recent big news in telecom was the advent of number portability. How will that affect telecom stocks? A: We believe number portability, both from a wireline-to-wireless perspective and a wireless-to-wireline perspective, will be a negative factor. On the wireline side, a study we're completing this week -- which will be available upon request -- is indicating that wireline-to-wireless will lead to increased substitution and pricing pressure. More details on the impact of local-number portability will be made available later on this week. Q: A related question -- do you think mobile operators are a threat to the residential market of the Baby Bells? A: Yes, we definitely do, both from pure land-line substitution and increased wireless usage. We believe the wireless carriers are putting sizable pressure on the Baby Bells, such as SBC Communications. We expect an increased impact from wireless substitution to occur, given local-number portability. Q: What are your thoughts on BellSouth (BLS )? Do you see merger possibilities? A: We have a hold opinion on BellSouth. We're modestly encouraged by the company's bundling efforts, but we see competitive pressures in both wireline and wireless products, leading to a 2% decline in 2004 revenues. Given BellSouth's intention of stock buybacks and increased dividends, and the company's current valuation, we have a hold on BLS shares. The wireless challenges we mentioned for BLS are identical for co-parent SBC, as they jointly share in Cingular Wireless' prospects. We believe Cingular is one of the weaker of the national wireless carriers and has to improve on a number of metrics to better compete with its peers. Q: What about Talk America (TALK )? A: We don't cover Talk America, but believe the company is competing aggressively against SBC, which we have mentioned throughout this chat. TALK is a small-cap stock. One of our favorite small-cap telecom-related plays is Intrado (TRDO ), which provides 911 emergency infrastructure for wireline and wireless companies. We see continued expansion of TRDO's earnings and free cash flow and have a 12-month target price of $30. Q: Finally, Todd, any quick tips on strategy for would-be telecom investors at this point? A: We [would] tread very cautiously in the telecom arena, given sizable competition in both the wireline and wireless spaces. Our favorite stocks -- Alltel, Nextel, and Nextel Partners -- are unique for the space, given the lack of direct competition in their operating markets. We don't believe this is the case for stocks such as SBC, FON, or Cincinnati Bell (CBB ). We again have an underweight recommendation for the telecommunications sector.
 Edited by Jack Dierdorff
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