loom for Qwest
Analysts weigh telco's solid profits vs. ongoing loss of phone
By Jeff Smith
Rocky Mountain News
November 4, 2006
Qwest Communications has earned a profit in three consecutive
quarters, generating hundreds of millions of dollars of cash in
the process. Its stock has nearly doubled in price from $4.50 a
share in the past year. But the profits and cash flow have come
mainly from cost cutting and frugal spending. Revenues remain
flat and under pressure, with the company's traditional phone
line business declining 6 percent annually because of increasing
competition from cable TV companies.
All of that makes some analysts wonder if this is the best the
Denver telco can do unless it gets more aggressive in making
acquisitions or building its own cable TV networks.
"I think (the stock) is overvalued and they'll probably make an
acquisition in the next six months," said Donna Jaegers,
telecommunications analyst for Janco Partners in Greenwood
Village. "(Chief Executive Dick) Notebaert has been patient on
acquisitions. But I think his window is closing as Comcast
continues to erode market share."
One problem is that Broomfield rival Level 3 Communications
already has snatched up some of the best candidates, with seven
acquisitions announced since the spring of 2005.
Tom Friedberg, a longtime Denver telecommunications analyst who
now is a consultant, gives Notebaert credit in showing things
weren't as bad as people thought in early 2005 by pursuing MCI.
But while things weren't as bad then, Friedberg also said he
doesn't believe things are good enough now to justify Qwest
stock being at the $9 level.
Qwest finds itself in a "strategic pickle" today, Friedberg
said. "What can they do for an encore?"
Investors seemed to agree somewhat this week. They bid Qwest
shares past $9 on Monday in anticipation of a good quarterly
earnings report the next day. But when Qwest narrowly missed
revenue projections and reported bigger phone-line losses,
investors took their profits, and shares slid below $8.50.
Jaegers, who has a sell rating, and Friedberg are pretty tough
on Qwest. But overall, seven analysts have sell ratings and 10
have hold ratings, while only five recommend buying the stock,
according to Bloomberg. The average target price is $8.14,
slightly below current levels.
Showing the variety of opinions, Frank Louthan of Raymond James
boosted Qwest to a buy this week. But Bears Stearns reiterated
its hold rating and noted "competitive pressures with wireless
and cable are only increasing."
To maintain investor momentum, Qwest needed to show better
numbers this week or a higher cash-flow forecast and didn't do
either, Jaegers said. "They were cryptic on their guidance, and
they certainly weren't raising the bar."
Qwest recently acquired OnFiber, a small communications provider
that serves 23 metro markets, for $107 million. But many think
Qwest needs to do a whole lot more to avoid being a small Bell
Neither Jaegers nor Friedberg criticize Qwest for being less
aggressive on acquisitions than Level 3. They note Qwest has a
different stockholder base, including phone company retirees and
other longtime investors who don't want to see their stock
values diluted by a big acquisition that involves stock or debt.
But Qwest doesn't have its own wireless network to offset the
loss of phone lines, Friedberg noted, and the company has yet to
prove that growth in high-speed Internet and data services will
do anything more than barely offset phone-line losses.
And Jaegers and Friedberg said Qwest inevitably will lose more
land lines to Comcast and Cox.
Some Qwest shareholders may be waiting optimistically for the
company to be acquired at a premium by another
telecommunications company or private equity firm. But the
current stock price, phone line losses and lingering litigation
from the Joe Nacchio accounting scandal days make that unlikely,
many analysts believe.
"Until Qwest can show how much share it will lose to Comcast and
what it can hold onto, I don't think anyone will touch it,"
Jaegers said. "There is a (local-phone) franchise that Qwest
will continue to have, but do they lose 30 percent?"
Qwest is capturing a portion of Comcast's cable TV market by
reselling DirecTV as part of communications "bundles." But
reselling somebody else's services generally isn't as profitable
as operating one's own, and Qwest has yet to spend the money to
aggressively expand its cable-TV infrastructure to compete with
Comcast head on.
For now, "Qwest is playing a game of chicken, and Comcast
increasingly is hogging the road," Jaegers said.
Qwest going ahead
• Likely needs to
buy more revenue, such as companies that help drive more
communications traffic onto its nationwide fiber-optic network.
acquisitions it may be difficult to offset growing phone-line
losses with revenue from high-speed Internet and data services.
• Will try to
continue to cut costs, but opportunities to do so may be
smithje@RockyMountainNews.com or 303-954-5155