Telcos Tremble as Views Cool on Wall Street

Curiously, a big pessimist during the bubble era who accurately predicted the sector's decline has now dramatically reversed her call on a couple of big players. Friedman Billings Ramsey analyst Susan Kalla upgraded Verizon and BellSouth to buy from sell Friday, citing improved fundamentals for the two companies.

AT&T shares fell 53 cents, or 2%, to $21 in late-morning trading. Baby Bells Verizon, SBC (SBC) and BellSouth also dipped 2%.

Wheeling and Dealing

Among the reasons bulls find hope in telecom is the still unproven assumption that some of the nation's seven phone giants will merge. The widely reported and widely denied hookup between AT&T and BellSouth takes top billing in the speculative arenas.

"People are buying [AT&T] on the basis that the Bells are going to buy them out," says Klugman. "But I think they will have a real hard time doing that."

Even if a merger of that magnitude could pass regulatory muster, AT&T's stock rise may have priced it out of any potential deals.

"The conditions motivating the potential for consolidation that is much discussed in the press don't seem to be improving to us," Goldman's Governali wrote in his report. "Just the contrary, with AT&T's stock where it is, an acquisition would be even less likely, in our view."

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