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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. Chaplin.

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," he says.

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.

Footnotes:

(2) Analyst's firm has an investment-banking relationship with the company.
(4) Analyst's firm has other business relationships with the company.



Write to Dionne Searcey at dionne.searcey@wsj.com

http://online.wsj.com/article/SB114772845121253326-search.html?KEYWORDS=Qwest&COLLECTION=wsjie/6month