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Telecom carriers get day in Wall Street sun

Updated:
Verizon shines on strong quarterly earnings report, while highly valued equipment makers' shares slide


By Vikas Bajaj / The Dallas Morning News

Telecommunications carriers and equipment makers switched roles Monday on Wall Street.

Carriers, which had been in the doldrums for much of 2000, posted solid gains on a strong earnings report from Verizon Communications Inc., of New York, while their equipment suppliers slipped on concerns about a spending slowdown.

"The manufacturers – the Nortels and Lucents – are coming into line," said Gary Jacobi, an analyst with Deutsche Banc Alex.Brown. "It's never a good thing to have a stock too far out of value. This is kind of a valid correction."

Nortel Networks Corp., the Canadian company with U.S. headquarters in Richardson, was down $2.56 to $40. Lucent Technologies Inc. was down $0.94 to $20.38. Cisco Systems Inc. fell $2.63 to $48.06.

By comparison, Verizon was up $2.56 to $55.63. And SBC Communications Inc. of San Antonio was up $1.81 to $58.13.

The price movements validate analysts and industry experts who have said for months that investors' valuation of carriers and their suppliers were out of whack: Vendors saw their stocks soar, while the companies that buy from them were being beaten down.

The downturn among equipment vendors, many of which are based in the Dallas area, started last week when Nortel reported unimpressive third-quarter earnings and revised growth projections downward.

Several analysts downgraded Nortel stock Monday, saying carriers spending on optical networking and other equipment would slow. The equipment is used by companies such as Verizon and SBC to transport voice and data traffic.

Paul Sagawa, an analyst at Sanford Bernstein & Co., said smaller carriers that were spending heavily on telecom equipment are burning through cash and are having a hard time raising more money.

Some, including Dallas-based CapRock Communications Corp., have been bought out by larger players.

"If the customer is not healthy, how can the vendor be healthy?" Mr. Sagawa said.

But a study released Monday by San Francisco research firm RHK Inc. says Nortel and others would continue to see strong demand for optical transport from carriers through 2004.

"Nortel Networks has experienced record growth in high-performance optical Internet solutions and continues to gain market share," Don Smith, Nortel's president for Optical Internet, said in a written statement.

On the buyers' side, Verizon reported robust growth in wireless – 806,000 new subscribers – and high-speed Internet access –130,000 new digital subscriber lines. It has 26.3 million wireless customers and 350,000 DSL users.

Verizon, the nation's largest local phone company, was formed in July with the merger of Bell Atlantic Corp. of New York and GTE Corp. of Irving.

Adjusted for its wireless joint venture with Vodafone Group PLC, Verizon earned $2 billion (73 cents a share) on revenue of $16.6 billion in the third quarter. That compares with $2 billion (72 cents a share) on revenue of $15.7 billion in the year-ago quarter.

"What we have been saying for a while now is that telecom is growing substantially," chief financial officer Fred Salerno said Monday. "We are selling many more widgets than we have" in the past.

Verizon's earnings echo results from its fellow Baby Bell telephone companies. Last week, SBC reported strong customer growth in wireless, long-distance and DSL.

Analysts say the results are another indication that regional Bell companies have a clear advantage over their former parent, AT&T Corp., and the other long-distance providers, WorldCom Inc. and Sprint Corp.

Local-phone companies own the "last mile" connections to residents and businesses, giving them an edge over other providers who have to lease those links if they want to sell local phone and data services.

"We do have access to customers directly and have a huge cash flow," Mr. Salerno said. "We see the cash flow growing, and that gives us the ability to be aggressive in going after new markets."

Since 1996, when Congress allowed long-distance and local-phone companies to get into each others' business, companies have been rushing to sell bundles that include all communications services.

"The [local] phone companies are moving this stuff," Mr. Jacobi said. "That's why their stock is up. People are starting to differentiate between the problems at AT&T and WorldCom and the opportunities at Verizon and SBC."
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