Consolidation trend, new services boost stock prices Wireless surge

Your Money

April 04, 2004|By Andrew Leckey

It remains a mystery why so many Americans feel they must speak three times as loudly into their cell phones as they would during normal conversation.

Reception is rarely that bad, and this intrusive practice leaves all of us innocent bystanders with a daily window into some of the most boring one-sided discussions ever to take place on our planet.

But there's no mystery at all as to why investors in wireless service and equipment companies have plenty to shout about in 2004.

The wireless services stock group, according to Morning-star Inc., is up more than 39 percent over the past 12 months.

That's almost enough to make you forget the group's three-year annualized decline of 13 percent.

Behind the run-up: Not only are wireless companies gaining subscribers, with half of Americans now owning cell phones, but more subscribers are using them as their only phones. They're also opting for such premium services as photo and data transfer.

Meanwhile, the impact of last fall's federal decision to allow customers in the top 100 U.S. markets to switch carriers without needing new phone numbers hasn't been impressive. Companies haven't had to spend big to replace lost customers.

The Cingular Wireless mega-deal to purchase AT&T Wireless Services for $41 billion in February was the major boost to the industry's stocks. It also might trigger more deals. Cingular is expected to sell off parts of the merged company to other providers and might even go public itself.

"The economics of the industry are definitely pointing to more consolidation," said Tavis McCourt, analyst with Morgan Keegan in Nashville.

"We think 2004 will see double-digit sales growth and widening profit margins," added Kenneth Leon, analyst with Standard & Poor's in New York. "Many of the operators are upgrading their networks for more advanced data and Internet capability."

Though recent wireless stock gains were impressive, the investment promise remains just that.

"Investors should keep an eye on this group, for there's still a lot of growth left," said Wayne Homren, analyst with Parker Hunter Inc. in Pittsburgh.

We may be approaching the saturation point where everybody who wants a cell phone has one, Homren said. However, offering new services and improved quality to existing subscribers is a less expensive way to make money than fighting over new subscribers.

"Camera phones have really taken off, and we're going to see a lot more features in the future such as downloads of audio, video and direct text transfers within a network," predicted Kevin Calabrese, an analyst with Argus Research in New York, who expects half of all calls to be wireless by the end of 2006.

But wireless stocks should only represent a small speculative portion of an individual's portfolio, since there always are regulatory and market risks.

"Despite somewhat better industry fundamentals, this remains a very unstable environment," warned William Benton, analyst with William Blair & Co. in Chicago. "The group is made up of highly leveraged stocks that move more than the overall market, whether up or down."

Andrew Leckey is a Tribune Media Services columnist.

5 stocks to watch

Here are some wireless industry stocks considered to offer the greatest potential gains:

Alltel Corp. (AT)

Derives 60 percent of its revenue from wireless but operates a rural wire-line company. It's recommended by Tavis McCourt of Morgan Keegan. Alltel is a financially conservative company that experienced a turnaround in operations over the past three quarters. It has emphasized its network advantage of having a reciprocal roaming agreement with mighty Verizon Wireless. Fewer customers are leaving Alltel's service, and there has been a significant increase in average revenue per user.

Nextel Communications Inc. (NXTL)

A wireless provider whose services include a long-distance digital walkie-talkie service, wireless data, Internet access and directory publishing, is attractive, according to Kevin Calabrese of Argus Research and Kenneth Leon of Standard & Poor's. Its stock is trading at a low price compared with its earnings; it continues to reduce its debt, and its top-line sales are growing 20 percent annually. Its all-digital data network is based on Motorola Inc. integrated digital enhanced network (IDEN) wireless technology.

Nextel Partners (NXTP)

A separate company from Nextel Communications, it operates in markets smaller than the top 100 that Nextel Communications services. It is recommended by Leon. Nextel Partners has more than 878,000 digital handsets in service.

Nokia Corp. (NOK)

The Finnish mobile communications company that manufactures handsets to meet all major standards and markets to customers in 130 countries, is recommended by Leon. It also makes entertainment and gaming devices and imaging phones. The company recently reorganized its structure into the four main businesses of mobile phones, multimedia, networks and enterprise solutions.

Qualcomm Inc. (QCOM)

A wireless equipment maker that is the leader in the code division multiple access (CDMA) technology used by Verizon and Sprint, is a stock choice of William Benton of William Blair & Co. and Leon. Churned customer accounts and customer upgrades greatly benefit the sales of this manufacturer, whose handsets are typically subsidized by the carriers. The company already enjoys an excellent stream of royalties. Its next-generation networks will increasingly use CDMA technology, another plus for the company. (William Blair & Co. is a market maker in Qualcomm stock.)

-- Andrew Leckey

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.