Goldman Whacks Telecom Sector With Downgrades

(Updated from 10:56 a.m.)

At least Frank Governali isn't making too many excuses.

In a research note this morning, the Goldman Sachs analyst rightfully admitted that the massive onslaught of downgrades and estimate revisions he and his staff unleashed on the telecom sector today might have been more appropriate 12 months or 18 months ago. "[But] midyear is a good time to consider the outlook for the remainder of the year, as well as the prospects for the new year."

The outlook doesn't seem too good. Governali downgraded WorldCom(WCOM), Network Plus(NPLS), McLeod USA(MCLD) and ITC Deltacom(ITCD) to market outperform, removing the companies from Goldman's recommended list. He also downgraded Equinix(EQIX), Level 3 Communications(LVLT), Metromedia Fiber Network(MFNX) and XO Communications(XOXO) to market perform from the recommended list, and he dropped Alaska Communications Systems(ALSK), Allied Riser Communications(ARCC), Focal Communications(FCOM), Net2000 Communications(NTKK) and Williams Communications(WCG) to market perform from market outperform.

The analyst did leave several names on the recommended list: Global Crossing(GX), Qwest(Q), AT&T(T), SBC Communications(SBC), Allegiance Telecom(ALGX), AT&T Wireless(AWE), Nextel(NXTL), Sprint PCS(PCS) and BCE(BCE).

Earlier this year, Governali downgraded the entire U.S. telecom sector to an underweight rating, saying that the individual companies will underperform the broader indices. He still thinks the stocks will underperform into 2002 because fundamentals haven't improved -- and there's hardly any indication that they will anytime soon.

The analyst said that he put out the specific stock downgrades now because he didn't when he issued the sector rating.

Governali said he also put out the individual downgrades because of "increasing evidence" that long-term growth and short-term earnings targets are becoming harder to achieve. He said the sector is struggling with too much competition, intense pricing, restructuring initiatives and regulatory uncertainties.

The analyst acknowledged the "untimely" release of these downgrades, but said that the stocks weren't doing so hot, anyway. "To varying degrees, stock prices already reflect this pessimistic assessment we believe that the group will continue to underperform until various challenges are worked through," he said.

Governali also cut the earnings estimates and price targets for Level 3, Williams and Worldcom. He cut his estimates and price target on Global Crossing, too, though he didn't change its rating.

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