Are there enough signals yet to reinvest in wireless telecom service stocks?

The reception for telecom services has been very clear throughout the “great telecom implosion” of the past two years. Facing slack demand, fierce pricing pressure and a cash crunch, it has been clearly dreadful. Times could be changing – for the better, believe it or not. One signal of the wireless telecom service segment’s resurgence is its year-to-date outperformance versus broader markets. What’s in store for this sector?

While many analysts remain neutral on the group’s overall investment outlook, they believe that a brighter future lies ahead, possibly in the next six to 12 months, due to these fundamentals:

• Higher EBITDA (earnings before interest, taxes, depreciation, and amortization) margins
• Positive as-reported earnings per share (normally reported as losses due to enormous service network and customer acquisition costs)
• A more stable pricing environment (because major wireless carriers are now more focused on profitable growth)
• Higher average revenue per user
• Improved customer-acquisition strategies (and therefore lower monthly customer turnover)
• Controlled capital spending (therefore lower bad-debt expense)
• Higher network capacity (via enhanced software and process improvements)
• Greater free cash flow

Longer term, many market watchers also strongly believe that the wireless telecom service industry will manage change – even positive change – with the lessons learned from the past two-year downturn. During this period, wireless-service providers became more efficient and street-wise, significantly shifting their focus from high-cost new-subscriber acquisition to customer retention and revenue enhancement.

The increasingly positive environment for the U.S. wireless telecom service providers, however, may be hampered by a FCC decision that allows users to keep the same wireless phone number whenever they switch carriers. This may very well lead to these negative factors:

• Increased competition between providers
• Customer churning
• Significant market share changes
• Protracted legal battles (to reverse the FCC ruling)

Some of the stocks that fall into this group include the following: Alltel, AT&T Wireless, BCE, BellSouth, Call-Net Enterprises, Deutsche Telekom, Manitoba Telecom Services, Microcell Telecommunications, Nextel, Qwest, Rogers Wireless Communications, SBC Communications, Sprint PCS, Telesystem International Wireless, Verizon and Western Wireless.

July 2003

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.