A wave of downgrades splashed cold water on steamy telecom stocks Friday.Signaling some discomfort with AT&T's ( T) two-month, 57% rise, analysts at Goldman Sachs and Jefferies cautioned that Ma Bell's recent buoyancy ignores the company's sinking business outlook. And while other stock watchers issued similar warnings about the regional Bell operating companies, one notable former bear turned positive. The moves come in the midst of a sweet spring for tech stocks, as shares have marched higher despite persistent warnings from bearish observers that the fundamentals are being left behind.
Self-FulfillmentOn Friday, Goldman analyst Frank Governali reaffirmed his AT&T rating at neutral, while Jefferies' Rich Klugman slapped a sell rating on the stock. Klugman in particular took issue with the market's surging enthusiasm, noting that the fundamentals in the telecom industry remain soft. "Because the stock is up, things must be good," he says by way of lampooning blindly bullish investors. "Well, they aren't." Wall Street's recent tech affections have seemingly ignored the uglier realities of an eroding business, whose price wars and customer declines continue to hobble big, widely held players. And as the gap between investor sentiment and business reality gets wider, more analysts are finding reason to ring the warning bells. Klugman downgraded AT&T after it rose beyond his $18 price target. Similarly, Governali cited AT&T's price-to-earnings ratio of 14 for 2004, which he says undeservedly puts it in league with the slightly more solid Bells.
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AT&T's two-month rally
Thomas Weisel analyst Ned Zachar, meanwhile, issued downgrades on regional Bell companies Verizon ( VZ), which he cut to neutral, and BellSouth ( BLS), which he cut to sell. In making those moves Friday, Zachar cited a recent run-up in the stocks and an absence of improvements on the sales and profits front.
Curiously, a big pessimist during the bubble era who accurately predicted the sector's decline has now dramatically reversed her call on a couple of big players. Friedman Billings Ramsey analyst Susan Kalla upgraded Verizon and BellSouth to buy from sell Friday, citing improved fundamentals for the two companies. AT&T shares fell 53 cents, or 2%, to $21 in late-morning trading. Baby Bells Verizon, SBC ( SBC) and BellSouth also dipped 2%.
still unproven assumption that some of the nation's seven phone giants will merge. The widely reported and widely denied hookup between AT&T and BellSouth takes top billing in the speculative arenas. "People are buying AT&T on the basis that the Bells are going to buy them out," says Klugman. "But I think they will have a real hard time doing that." Even if a merger of that magnitude could pass regulatory muster, AT&T's stock rise may have priced it out of any potential deals. "The conditions motivating the potential for consolidation that is much discussed in the press don't seem to be improving to us," Goldman's Governali wrote in his report. "Just the contrary, with AT&T's stock where it is, an acquisition would be even less likely, in our view."