Telecommunications: Fixed Line
Top Analyst: Jonathan Chaplin, J.P. Morgan Chase
Notable Picks: Qwest, Alaska Communications
By Dionne Searcey
The Wall Street Journal
Monday, May 22, 2006
It's a tumultuous time in the fixed-line telecommunications
industry. Competition from cable companies is heating up,
and phone companies are looking to the Internet, wireless
service and television for future revenue. Several major
phone companies last year undertook mergers they hoped would
offset losses to their core business.
The No. 1 Best on the Street analyst in the sector, Jonathan
Chaplin of J.P. Morgan Chase & Co. in New York, looked
beyond the buzz on Wall Street, relying instead on his
analysis of companies' financials and interviews with
managers to sniff out success stories.
That approach paid off with his "buy" recommendation in May
on Qwest Communications International Inc., as the stock
returned 54% through the end of the year. "The street was
negative on the company for such a long time that we had
time to get in-depth in numbers," says 34-year-old Mr.
His March "buy" recommendation on Alaska Communications
Systems Group Inc. also was a good call, yielding a 28%
return for the rest of the year.
Mr. Chaplin says that in retrospect he was too positive on
AT&T Inc., formerly SBC Communications Inc., which completed
its acquisition of AT&T Corp. late last year and adopted the
company's moniker. He put a "buy" rating on the stock in
late March, and it returned 8.6% through Dec. 31.
For this year, however, his top pick is AT&T, which recently
announced plans to take over BellSouth Corp. Mr. Chaplin
thinks AT&T will benefit from cost cutting if the deal is
approved. He is positive on fixed-line phone companies, he
says, because he thinks consolidation will lead to better
returns as the companies increase their presence in the
wireless and business markets.
The No. 2 analyst in the group, Jeff Halpern of Sanford C.
Bernstein & Co. in New York, a subsidiary of
AllianceBernstein LP, saw success from his detailed
financial models of companies he covers.
Mr. Halpern also liked Qwest, and he kept a "buy" rating on
the company all year, for a 27% return. "I stuck to the
simple stuff and tried to go over the operations and
financials to understand tactically what they were doing,"
But BellSouth performed better than he had anticipated. A
"hold" on the company from April 2005 through year end meant
he missed out on a 5.9% return, though his "sell" rating at
the start of the year turned out to be a smart move as the
stock returned minus 3.9%.
Mr. Halpern, 37, upgraded Verizon Communications Inc. to
"buy" in November and says the stock is his top pick for
2006. Though he thinks Verizon may not be able to wring out
significant value from its recent acquisition of MCI Inc.,
Mr. Halpern believes the company is making a wise investment
by upgrading its network with fiber optics.
Third-ranked Peter Rhamey, of BMO Nesbitt Burns in Toronto,
which is part of BMO Financial Group, looks for companies
that are good at cutting costs but also have exposure to
wireless service. This led him to rate Canadian Telus Corp.
a "buy" for most of the year as the stock returned 41%.
Mr. Rhamey, 45, thinks savings from the industry's spate of
mergers won't be realized for two years or more. He likes
the stock for 2006 because he thinks that cable competition
in Canada isn't as intense as in the U.S. and that the
company has room to grow.
(2) Analyst's firm has
an investment-banking relationship with the company.
(4) Analyst's firm has other business relationships with the
Write to Dionne Searcey