, Dublin. M.B.A.,
City University of London Business School
. Simon Flannery has covered U.S. wireline stocks at
Morgan Stanley Dean Witter
since 1999. Before joining Morgan Stanley, he worked in a similar capacity at
. He has tracked the telecommunications industry since 1989.
Industry Outlook and Style
Perhaps one of the most dramatic stories in the integrated telecommunications sector this year has been the precipitous fall of
stock, which has lost more than half of its value since Jan. 1. Last May, the once-mighty Ma Bell lowered its guidance on 2000 earnings. And most recently, the company sought to address its troubles by announcing on Oct. 25 that it would voluntarily split itself into four companies. (
wrote about this breakup in a separate
Simon Flannery saw trouble brewing at the company early on: Throughout 1999 and this year, he warned investors that increasing competitive pressures in the long-distance market would result in lower revenue and earnings growth. While his official rating on AT&T has been neutral, Flannery's comments have sounded more like "sell."
Flannery's outlook for the sector as a whole could be described as chary: "I see increased competition and its attendant pressures, I see declining returns on invested capital, and I see a need for companies to buy more spectrum at upcoming wireless auctions in order to boost capacity for next-generation services," he says.
But all is
gloom and doom, according to the analyst. "This scenario is balanced by attractive valuations and solid growth in the data and wireless segments of the industry," he says.
Because of his belief in the growth prospects for wireless services, Flannery names
as one of his top choices for the next year. (He has had a strong buy rating on it since January 1999.) SBC is "one of the best-managed of the local phone companies, with a strong position in both the local market and in wireless and leadership in DSL service," says the analyst.
Going forward, Flannery believes SBC is poised to benefit from two moves it made in 1999: investing heavily in local broadband capacity and merging with
. He expects synergies from the merger to become apparent in 2001. So far this year, the stock has climbed 19%, and the analyst reckons that shares will advance a further 15% in the next 12 months. (He has a $66 price target on SBC, which closed on Oct. 30 at $58.13)
Flannery's top stock pick, however, is
, the new entity created from the July 1 merger of
. That union created the nation's No. 1 provider of local phone service, notes the analyst, who expects the synergies created from the combination to be good for the stock.
Valuation is another reason Flannery likes Verizon: At 16 times 2001 earnings, it's one of the cheapest regional Bell operating companies, he contends. As a point of comparison, the Morgan Stanley analyst notes that SBC is trading at about 20 times earnings.
Flannery also promotes
, which offers "a strong management team, a next-generation long-distance network and attractive local assets with significant merger synergies." Qwest merged with
U S West
this summer and subsequently sent waves through the industry when it announced in September that it planned to cut 11,000 jobs, most of them from U S West. (
wrote about the layoffs in a separate
Favorite stock for next 12 months:
Verizon; price target: $85
"We see Verizon's core earnings accelerating at slightly above 10% next year. That would put it at the upper end of industry earnings growth. What will cause this to happen? There will be significant synergy opportunities from the merger of Bell Atlantic and GTE, which took place on July 1. In addition, there will be strong growth in the data services business. Even though Verizon stock has fallen 10% year to date and is now trading in the low $50s, we think it will be the best-performing stock in the next year, improving 70%."
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Which stock do you like best?
Jacobs: SBC Communications