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JANUARY 17, 2003 STREET WISE By Olga Kharif Wait for the Next Wireless Wave? Despite the sector's recent stock rally, the industry's fundamentals are still going in the wrong direction
Then, after Merrill Lynch upgraded the sector on Dec. 30, investors fell in love with wireless all over again. Shares of many big names jumped: No. 3 wireless-service provider AT&T Wireless (AWE ) is up 28%, to $7.38 as of its Jan. 15 close. Wireless-equipment leader Ericsson (ERICY ) rose 42%, to $9.63. And No. 1 cell-phone maker Nokia (NOK ) rallied 6%, to $16.26. Sprint PCS (PCS ) shares rose 11.5%, to $5. Too bad the latest love affair may not be justified. "The industry fundamentals haven't changed" since last year, says Shep Perkins, a telecom-sector leader at Fidelity Investments who manages $768 million in assets. The main reason is that wireless subscriber growth continues to slow. At the same time, carriers' revenues per user are declining at 1% to 2% every year, says Peter Friedland, an analyst with W.R. Hambrecht. That will continue at least until service providers introduce new applications to attract consumers. CHANGE OF PACE. As a result, debt-laden providers are cutting back on equipment purchases. Demand for cell phones will grow only 10% this year, by most estimates. That's better than 2002, when sales remained flat, but certainly no reason to party. The rally is probably best explained by a change in investors' perceptions. After 50% annual growth in the late 1990s, service providers' 15% to 20% growth last year looked lousy -- and investors ran for cover. Since then, they've gotten used to the slower pace. And the main beneficiaries so far in 2003 have been the Big Six wireless service providers -- though this group is expected to grow by just 8% this year, estimates Craig Mallitz, an analyst with Legg Mason. That's comparable to expectations for the beleaguered PC industry, which is projected to grow 8.5% in 2003, according to tech consultancy IDC. Wireless investors, however, nurture hope that growth will surprise on the upside. The fourth quarter wasn't bad, and perhaps that's a sign that things will improve, the thinking goes. Plus, the industry could consolidate this year, reducing price pressure. Cell-phone users could start buying new phones in droves. And the new services could catch on. LATE TO THE TABLE. The bulls also argue that telecom-stock valuations are comparatively low. Back in January, 2001, AT&T Wireless traded at $17 a share. And just one year ago, it could be had for $14.44 -- around 50% more than today. These new bulls, however, are late to the table. Perkins bought his cell-phone makers' shares three to six months ago. Today, he says the sector is by no means undervalued. And Michael Mahoney, a senior portfolio manager and managing director at EGM Capital funds in San Francisco, says he recently sold the Sprint PCS shares he picked up late last year. The wireless industry's fundamentals must improve for wireless to become an attractive investment again, says Friedland, who has a neutral rating on the sector. Absent more consolidation, U.S. carriers will continue to suffer from price wars. In the third quarter of 2002, per-minute charges averaged 12 cents, down from 14.6 cents in the same quarter of the year before, estimates Mallitz. ROSY FORECASTS. And pending legislation that will allow consumers to keep the same phone number when changing carriers could lead to more turnover -- and pressure on profits. In fact, Merrill believes that carriers in emerging markets rather than those based in the U.S. are the better bet, says Zhen-Hong Fan, a technology strategist at Merrill. Thus, Merrill likes Korea's SK Telecom (SKM ) and Russia's Vimpelcom (VIP ). Furthermore, cell-phone sales probably won't shoot through the roof this year, as Merrill predicts. In fact, the firm's forecasts are about 10% ahead of other analysts' projections. Merrill's rosy forecast depends heavily on a pickup in European sales, as existing subscribers upgrade to new phones with advanced features and color screens, says Fan. Optimists expect the same replacement wave to hit the New World, but so far no signs of a massive surge in demand are apparent. And in the U.S., the scarcity of new applications makes the snazzy new phones less alluring than in Europe. "BlackBerry works just fine," says Andrei Jezierski, a partner at tech consultancy and venture-development firm i2 Partners in New York. SEARCH FOR SLEEPERS. Equipment makers face the greatest difficulties. As carriers increasingly focus on profits, they're cutting budgets for new infrastructure. In fact, their spending in the U.S. may fall by 5% this year, estimates Andrew Cole, an analyst with telecom consultancy Adventis. That comes on top of a double-digit plunge last year. And 2003 could easily turn out even worse than expected: On Dec. 26, AT&T Wireless announced that it will roll out its new networks in only four markets -- instead of a dozen, as previously anticipated -- by the end of 2004. Still, a few positive signs have popped up lately. Nextel (NXTL ) is already profitable, and AT&T Wireless and Sprint PCS are moving in that direction: the former in 2004, and the latter in 2005, Mallitz estimates. However, many portfolio managers advise against buying into the sector now. At best, investors bent on holding wireless stocks should look for component suppliers, whose stocks haven't rallied as much as others yet. Mahoney of EGM recommends Qualcomm (QCOM ), which makes chips for cell phones and licenses advanced wireless technologies, as a long-term buy. The stock has fallen recently on the news that cell-phone sales in Korea, where Qualcomm sells parts, have slowed. It closed at $38.37 on Jan. 15, down from its 52-week high of $50.42. SoundView Technology Chief Technology Strategist Arnie Berman likes chipmaker Texas Instruments (TXN ), the leader in cell-phone chips. Its shares closed around $16 on Jan. 15, or 55% off their 52-week high of $35.94 hit last spring. Still, "I wouldn't say wireless is the best place in telecom to be," says Fidelity's Perkins. And that's the sad truth behind the latest rally.  By Olga Kharif in Portland, Ore. Edited by Thane Peterson Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | JANUARY |
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