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Reuters
Telecoms Stocks Surge in New Year Rally
Thursday January 2, 4:40 pm ET
By Jessica Hall


PHILADELPHIA (Reuters) - Shares of U.S. telecommunications stocks jumped in a New Year's rally on Thursday, outpacing gains in the broader market, as investors placed bets that the worst may be over for the beleaguered sector, analysts said.
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Although industry executives still hesitate to forecast a recovery, some investors think the sector may have finally hit bottom and the bad surprises may be over, analysts said.

"I don't think this is going to be a great quarter for telecom, but it could be the bottom in terms of revenue. From there, hopefully you get good earnings growth momentum. It's a bet on the bottom," Avterra Management analyst Tom Lauria.

"The bets are being made that, all things being equal, you get a better year."

Last year, telecommunications companies from wireless carriers to Baby Bells to equipment makers suffered as the economy languished and corporate customers scaled back on spending. Bankruptcies, job cuts, and earnings warnings became commonplace events.

But stocks rose Thursday as the market took off following the release of economic data.

"Most of the telecoms are up with the market, and the few outpacers are stocks that look the cheapest after being sold off late last year," said one analyst who declined to be named.

"Also, there's an increased awareness of dividends and stability, and telecoms (services) are one of the few sectors where dividends tend to get paid come rain or come shine," the analyst said.

TELECOM STOCKS RALLY AFTER DECEMBER SLUMP

The North American Telecommunications Index (AMEX:^XTC - News) jumped nearly 6 percent on Thursday, outpacing a 3.3 percent increase in the broader Standard & Poor's 500 Index.(CBOE:^SPX - News) The Philadelphia Stock Exchange wireless index (Philadelphia:^YLS - News) added 6.2 percent, while the American Stock Exchange Networking index (AMEX:^NWX - News) surged 7.8 percent.

Several telecom stocks stumbled in December after a rally in October and November. Still, in the fourth quarter, the North American Telecom index rose 42 percent, while the networking index added 53 percent and wireless index gained 55 percent.

A better-than-expected report from the Institute for Supply Management, which showed that activity in the beleaguered U.S. factory sector jumped in December after three months of decline, also helped trigger the New Year rally, said Henry Asher, president of the Northstar Group, a New York-based money manager, which owns shares of Cisco Systems Inc. (NasdaqNM:CSCO - News) and some Baby Bells.

Big gainers on Thursday included AT&T Wireless Services Inc. (NYSE:AWE - News), which gained 59 cents or 10.4 percent, to close at $6.24 and Qwest Communications International Inc. (NYSE:Q - News), which closed up 36 cents, or 7.2 percent, at $5.36. SBC Communications Inc.(NYSE:SBC - News) rose $1.80, or 6.6, at $28.91.

Equipment maker Lucent Technologies Inc. (NYSE:LU - News) added 16 cents, or 12.7 percent, to close at $1.42, while its Canadian rival Nortel Networks Corp. (Toronto:NT.TO - News; NYSE:NT - News) jumped 25 cents, or 15.5 percent, to close at $1.86.

TELECOMS MAY MEET, EXCEED WALL STREET'S CAUTIOUS VIEW

With no major warnings from telecom companies about fourth-quarter results, there could be speculation that they will slightly exceed Wall Street's tepid expectations, said SoundView Technology Group analyst Kevin Slocum.

Another analyst suggested that a New Year's Eve regulatory ruling could foreshadow favorable decisions down the road for the Baby Bells.

On Tuesday, the Federal Communications Commission agreed to a request to eliminate a requirement that SBC file tariffs outlining its offerings and prices for advanced services.

Although the decision applies only to SBC's affiliate that offers advanced, high-speed data services such as DSL (digital subscriber line) or ATM (asynchronous transfer mode) services, it was viewed by investors as a positive for the Baby Bells as a group, said Guzman & Co. analyst Patrick Comack.

"It's a ruling for SBC, but it's seen as a ruling for the RBOCs in general.... it could portend positive regulatory relief going forward for the RBOCs (regional Bell operating companies)," Comack said. "This ruling levels the playing field between cable modems and DSL."

Wireless carriers, meanwhile, may top Wall Street's cautious fourth-quarter subscriber forecasts as sales strengthened near the holidays, according to a Merrill Lynch report. The wireless sector had been hard hit by concerns of price wars and stiff competition.

"We think that investor expectations for (fourth quarter) subscriber growth are fairly low, such that actual results at most national operators are likely to be in line with, and perhaps in some cases better than, investor expectations," Merrill Lynch analysts said in a report.

"It seems that while November was weak and early December was slow at many stores, sales started to trend up ... either after Thanksgiving or shortly before Christmas," said Merrill Lynch, which expects the U.S. wireless industry to have added 12.5 million in customers in 2002 and 11 million in 2003.