Sell AT&T, Merrill Urges

It cites intense residential long-distance competition and an increasingly rich valuation.
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Intense competition among residential long-distance providers and a lagging market for business telecommunications make

AT&T

(T) - Get Report

a sell, Merrill Lynch argued Tuesday.

Merrill cut AT&T from neutral, saying it expects 2003 revenue to fall 7.9% and another 4.8% in 2004. The shares were recently down $1.06, or 5%, to $20 on the Instinet premarket session.

"Valuation remains hard to pin down as revenues and earnings decline for the next several years -- yet near term free cash flow and the dividend yield provides support -- interestingly, as with the regional bell operating companies, AT&T has recovered strongly having passed way beyond the 5% dividend level," the brokerage wrote.

"That said, as we assess it, at

last night's close of $21.06 a share the stock now offers a less attractive risk/reward profile and we are downgrading our opinion to sell from neutral." Merrill said its discounted cash flow model implies intrinsic value of $20.74 a share.

Merrill also noted that the likelihood that

MCI

will emerge from Chapter 11 before the end of the year creates additional competitive pressure. It recommended

Verizon

(VZ) - Get Report

as a superior play for investors looking for yield.