If you're wondering who's responsible for the stratospheric rise in some battered wireless carrier's stocks, look no further: It's your fund manager.
The wireless industry has taken a beating the past few years as the bubble burst and profits remained elusive, with the carriers no exception. But as a few players have turned the corner on profitability, fund managers have rushed in to place their bets. A quick glance speaks volumes about the smart money's bets on the sector's likely winners and losers.
Within this fiercely competitive sector, some players will be forced to consolidate in the next 12 months. "Consolidation is likely.
And it will reduce the number of players, hopefully creating a more rational pricing environment benefiting all remaining players," said John Krause, equity research analyst for Thrivent Financial.
According to data through the third quarter, compiled by fund-tracker Morningstar for
, fund managers have dog-piled into
since the summer, helping fuel the stock's 400% gain. Value fund managers, meanwhile, are finding plenty to like in
. But by and large, they are getting out and staying out of money-losing
As we reported last week, the nuts and bolts of the wireless industry -- names like
-- have once again returned to favor, posting huge share gains and finding friends among the value-fund set. Today, let's take a closer look at how money managers have played three wireless carriers, and what the company's prospects are for 2003. We've asked RealMoney's Wireless Wiz, Tero Kuittinen, to weigh in on what he sees as the key issue for each carrier.
AT&T Wireless: The Value of a Solid Balance Sheet
Because of its relatively strong balance sheet, AT&T Wireless has become a darling of the value set, with value-minded
American Funds Growth Fund of America snapping up 66.8 million shares in the third quarter. Nearly 20 value funds have at least 1% of their assets in AT&T Wireless, and it shows up in 22% of all large-cap value funds vs. just 12% for large-cap growth funds, according to Morningstar.
The reason? AT&T Wireless is poised to grow over the next 12 months, it sports a lower cash-to-debt ratio than its peers and looks set to increase market share, possibly via acquisitions.
Source: Morningstar, Bloomberg, BigCharts.com
"They have $3.75 billion in cash and about $11 billion in debt -- a cash-to-debt ratio of 34%," said Rodney Singleton, research analyst for Henssler Equity Fund, which has no position in the company. "By comparison, Nextel has $2.4 billion in cash and $13 billion in debt. These guys are in a much better financial position when consolidation comes."
Among the wireless carriers, AT&T Wireless has become the favored stock of value-fund managers. As of Sept. 30, 73, or 22%, of the 334 large-cap value funds own the stock -- compared with 4.4% for Nextel and 3.6% for Sprint PCS.
But this isn't to say that AT&T Wireless is a screaming buy. At current prices, you'd be paying $7.50 a share for a company that hasn't turned a profit in a year, and might not next year, either. It has no E to determine a price-to-earnings multiple. However, its price-to-cash flow is 8.2, below the industry average 14 and the S&P 500's 13.1.
AT&T Wireless is in the middle of a costly network upgrade. To accelerate the changeover, AT&T Wireless has slashed prices aggressively, but if they miss targets, then analysts warn the company will have little to show for its network investment. Industry watchers are playing close attention to the company's churn rate -- the number of customers it loses to rivals.
"If the churn rate soared, that would be a sign that customers aren't accepting GSM and going elsewhere," said Todd Bernier, wireless analyst for Morningstar. "But they do have the best balance sheet in the business. They're flush with cash. They've got a good CEO and they're likely to take someone out if they have to."
Tero's Thoughts: "AWE was suprisingly robust over thesummer, considering how rapidly Cingular growth has stalled; AWE isamong the best in consumer satisfaction surveys that are increasingly drivenby coverage issues."
Nextel: We Mean Business
Nextel's shares have more than quintupled since the beginning of the third quarter, in part because the company's debt-cutting moves, but also because the stock got so low that fund managers couldn't resist it -- even if it was saddled with a $12 billion debt and a stagnant, but increasingly competitive industry.
Nextel Turns Up
Source: Morningstar, Bloomberg, BigCharts.com
According to Morningstar, American Funds Growth Fund of America also snapped up 28.4 million shares in the third quarter, placing a big bet that Nextel can survive solo. The upshot is that these managers believe direct connect can continue to drive Nextel's business, which could be difficult as next-generation services hit the market.
Whether the fund managers are betting on long-term growth at Nextel or merely engaging in a little performance-chasing, momentum investing isn't clear yet.
In the race to consolidate, Nextel is the most likely to end up without a partner because the company uses Motorola's iDen standard to provide the direct connect feature that is the company's biggest selling point. By running on iDen, instead of CDMA or another standard, Nextel is totally incompatible with anyone who would acquire it.
Nextel's reliance on iDen could leave it behind the curve over the next 12 months. "There have been rumors of development and future offerings
of a push-to-talk service at Verizon and Sprint PCS -- although PCS was delayed due to technical issues," said Krause. "Further out, if data offerings take off at competitors, then Nextel would be forced to upgrade its network sooner than current liquidity would support."
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While competition is fierce, Nextel's high-quality subscribers in the business field are a lucrative and stable lot. As a result, managers have been buying based on the company's low churn rate and its revenue per user rate, or RPU, which is highest in the industry.
A positive sign for Nextel is if the company uses free cash flow to pay down debt, but industry watchers say investors should pay the most attention to the number of subscriber additions in the fourth quarter. This is a sign that your manager has made the right move for the future -- that iDen-based Nextel can gain ground no matter what rivals roll out.
"Nextel has planned a major push to blow out their number of subscriber additions in the fourth quarter," said Hyers. "The initial signs are that they're going to achieve their targets. Salespeople have been telling me they've had phenomenal growth in the last month."
Tero's Thoughts: "Nextel has an ARPU that's among the highest in the entire world, so the question of how long it can resist pricing pressure is one of the most interesting in the industry."
Sprint PCS: Unloved
During late 2001, Sprint PCS was the popular choice among fund managers, appearing in more than 17% of all portfolios, better than the 11% who held Nextel and 14% for AT&T Wireless. But over the past 12 months, PCS stock fell 83% and it now appears in just 10% of all portfolios, worse than both its competitors.
This carrier has the worst track record with customers and now it's given investors a black eye as well, dropping from $67 in April 2001 to $1.75 on Sept. 30, 2002 -- a 97% drop. The rapid increase in the company's debt levels, coupled with negative subscriber growth, has driven away Janus, which ditched the last of its positions in September.
But its stock is up 122% since hitting its September low. The company has a new CEO at the helm
who is willing to cut costs, but Sprint PCS faces big operational hurdles, including an extremely high churn rate and an RPU much lower than rivals.
Sprint for the Exits?
Source: Morningstar, Bloomberg, BigCharts.com
Financial straits have PCS management working at cross-purposes. On one hand, PCS has to pay down debt and cut costs. But on the other, it has to roll out expensive next-generation services to attract higher-paying customers. "You need to ask yourself: At what point does this company make a profit?," asked Ken Hyers, senior analyst of wireless carrier services at Instat/MDR. "Somebody has to fold at some point."
relaunched T-Mobile unit unlikely to fold anytime soon, PCS's high debt load and shoddy subscriber growth make it a riskier bet than rivals. The fund skippers taking a chance on PCS hope the company can: cut churn, increase subscribers and boost RPU with its Vision PCS national data network.
"The big thing is getting people to pay for data," said Andrew Cole, senior vice president of strategy at Adventis. "In Europe, 15% of revenue comes from data. Sprint's is under 4%."
Tero's Thoughts: "Sprint has bet heavily on mobile data, but its recent slide in consumer satisfaction and market share shows that its coverageproblems render it highly vulnerable."