BellSouth

(BLS)

was trading at its worst level since 1997 after turning in a weak second quarter and guiding full-year estimates lower.

The company reported second-quarter earnings of $293 million, or 16 cents a share, down 67% from $880 million, or 47 cents a share, a year ago. Revenue fell 1.6% to $7.24 billion from $7.35 billion.

In the second quarter, BellSouth took a 19-cent charge for loss on equity investments, related in part to its stake in

Qwest Communications

(Q)

, and a 12-cent charge to pay for job cuts. The phone company was also hurt by the Latin American currency devaluation. But on a conference call with analysts, BellSouth said that its biggest issue was a softening of business demand.

"There is no decision being made for telecom spending by key customers," said BellSouth's chief financial officer, Ron Dykes, on a conference call with analysts. "We had expected earlier that we might see some revenue improvement in the second half of the year. But it does not seem to be forthcoming."

Low Visibility

On the call, Dykes said he couldn't say when spending would ultimately return. Once considered the safe spot in telecom, the regional bells seem less immune to the rest of the industry's woes.

Lately, investors were punishing BellSouth, off 16.5% at $23.06, alongside the other regional bells.

Verizon

(VZ) - Get Report

was down 11% at $29, while

SBC Communications

(SBC)

was off 9% at $24.30.

"Business demand is a critical factor," said Patrick Comack, an analyst at Guzman & Co. "And judging by today's selloff, investors do not think that it is going to come back until mid-2003."

For the year, Bell South said it expects revenue to fall 2% to 3%, compared to prior estimates for it to rise 1%. The company reduced its earnings estimate to between $2.13 and $2.20 a share from $2.43 a share. "I think people were shocked they lowered guidance," said Comack. "I didn't expect them to do it."

Too Far Gone

On the flip side, Comack feels that investors might be overreacting to BellSouth's earnings news. "If you think spending will recover in 2003, you should be looking at forward growth," he said. By that metric, the stock is trading at 9.5 times 2003 earnings, a 36% discount to

S&P 500

.

Meanwhile, other analysts raised concern about BellSouth's outlook, even if it may be cheap. "While the company has a strong balance sheet, is generating cash, is committed to a share buyback and trades on a low-double-digit P/E, these results point to a weaker long-term outlook," said Adam Quinton, an analyst at Merrill Lynch, who downgraded the stock to neutral from buy, in a research note on Monday.

Among other concerns for the company is losing wireline customers to competing wireless providers. While BellSouth owns 40% of Cingular Wireless, there are many wireless options out there. "In wireless, BellSouth is just one of a half-dozen choices," said Richard Klugman, an analyst at Jefferies.