Bio

B.A.,

Northwestern University

. M.S.,

Columbia University

. Tod Jacobs has been a telecom strategist at

J.P. Morgan

since May. Before that, he climbed up the research ranks at

Sanford C. Bernstein

, joining that firm as a research associate in 1989. He was made a senior analyst covering the publishing industry in 1992, subsequently switching to telecommunications services coverage in 1996. Before becoming an analyst, Jacobs was an investigative journalist and television documentary and news producer.

Industry Outlook and Style

Tod Jacobs has an underweight stance on telecommunications services generally. But despite this overall negativity on the sector, he and his J.P. Morgan team -- David Barden, Marc Crossman and Todd Rethemeier -- do have some stocks they like. In the emerging long-distance and competitive local exchange carrier, or CLEC, arena. The group favors

XO Communications

(XOXO)

(formerly

Nextlink

) and

Level 3 Communications

(LVLT)

.

In addition, the squad prefers the regional Bell operating companies, specifically

SBC Communications

(SBC)

, which is Jacobs' top pick, to the long-haul carriers. According to Jacobs, "The locals have the ability to more rapidly enter new businesses that can offset erosion in their core franchises than do the long-distance providers." Meanwhile the team names

Nextel

(NXTL)

and

Sprint PCS

(PCS)

as one of the strongest names in wireless, which Jacobs believes is the highest-growth area of the entire telco market.

Jacobs names several major trends that he believes will dominate the telecom sector over the next five years: First, he foresees continued deregulation of the industry. He also anticipates a significant increase in competitive intensity. Last, the emergence of the Internet and related technologies has utterly altered the telecommunications landscape and will continue to do so. Taken together, these factors will cause revenue growth to slow from the 10.5%-11% rate of the past five years to more like 9% in the next five, he believes. This is because pricing in traditional voice and data businesses will fall, more than offsetting continued strong growth in volume across the board.

The forces shaping the industry today bode poorly for companies with traditional voice and data business, which Jacobs refers to as "legacy business." Traditional telecommunications businesses are poised to become undone by new technologies, he believes. "To the extent a company has lots of legacy businesses driving revenue and earnings," says Jacobs, "it'll face a difficult period of transition, as Internet Protocol services come in and cannibalize those traditional services."

The players facing the greatest challenge in this transition will be the large long-distance carriers, a group that includes AT&T and Sprint. Those he expects to benefit the most are Level 3,

Genuity

(GENU)

, XO and edge player

Inktomi

(INKT)

.

New technology alone will not "undo the old players," contends Jacobs. Long-term success depends on "how a carrier utilizes the network," he says. By "utilize," he means how a company fills up its network.

The analyst also warns that not all the new carriers will succeed. "A number of them will likely go out of business, either by being acquired or by going bankrupt," he says. In Jacobs' view, Wall Street has "handed out too much capital to too many players, thus potentially depressing returns for all carriers." In his opinion, older companies will have to restructure themselves in order to separate their mature businesses from their growth businesses, and emerging carriers will need to develop successful strategies to win and retain customers.

Stock Pick

Favorite stock for next 12 months:

SBC Communications

Comment:

"SBC Communications operates local phone service in 13 states, making it well-positioned within the telecommunications industry. The company also provides new products such as DSL and long-distance voice. At the same time, SBC is expanding to provide local services outside of its 13-state region, which will compensate for the market share it will lose to competitors in its own region in the wake of legislation opening up local markets."

Rate Their Stock Picks:

Which stock do you like best?

Jacobs: SBC Communications

Flannery: Verizon

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