RIDING THE Telecom PHENOM - stocks to be considered

Kiplinger's Personal Finance Magazine, Sept, 1999 by Manuel Schiffres, Ian Baldwin

Just as it did in the U.S., deregulation is undoing state monopolies in Europe and Latin America, creating opportunities for outside players and a lot of cross-border handshaking. BellSouth, for one, is the largest wireless-service provider in Latin America, where land wires are relatively scarce. Three American companies are building their own European fiber networks. Others are landing on the Continent via joint ventures.

The six telecom stocks we spotlight could ring up big returns in the coming years. Two of them, descendants of old Ma Bell, are relatively sedate (though we stress the word relatively). Two others, an equipment maker and a wireless-services provider, are suited for aggressive investors. The last two, an emerging long-distance company and an alternative local phone-service operator, are best considered speculative. By focusing on these six, by the way, we aren't casting aspersions on some other telecom stocks the magazine has featured lately--in particular, Bell Atlantic, MCI WorldCom and Qwest Communications (see "Stocks That Fit Your Style," June). Those three remain good choices for the long term.

THE SEDATE INVESTMENTS

When the government broke up Ma Bell 15 years ago, investors could choose among seven reasonably conservative providers of local phone service. However, by the time the current round of industry consolidation is through, only three of those Baby Bells will be left. The one that may have the best growth prospects is SBC Communications (symbol SBC, New York Stock Exchange, recent price $57).

SBC, which owns Southwestern Bell, acquired Bell sibling Pacific Telesis in 1997 and Southern New England Telephone last year and will soon merge with Ameritech, the Baby Bell serving the Midwest. SBC will then control about one-third of the nation's local phone lines, and it has announced plans to build local fiber-optic networks in 30 markets outside of its current territories.

But SBC's ambitions clearly lie beyond plain old telephone service. It is a major force in wireless service, with 7.2 million customers--not including the 4.6 million customers it will inherit from Ameritech and another cellular company it is acquiring--and revenues running at a rate of about $4 billion a year. It has stakes in phone, cable and wireless operations in Europe, Latin America and Asia. In addition, SBC has an agreement to acquire up to 10% of Williams Communications, which is building a nationwide long-distance network. SBC, like the other Baby Bells, is barred from offering interstate long-distance service from within its territories until it can demonstrate that it has opened up its local phone system to competition. But many analysts think that regulators will give the company approval this year to begin offering long-distance service in either Texas or California.

SBC said it thinks it can deliver earnings growth of 13% to 15% a year when combined with Ameritech. Unlike most of the sexier telecom stocks you'll read about elsewhere in this article, SBC makes money now. Without taking the merger into account, analysts expect SBC to earn $2.38 per share this year, according to First Call, giving the stock a modest (for this market) price-earnings ratio of 24. "Considering the growth rate you're getting and the price, this is a conservative play in telecommunications," says Liam Burke, co-manager of Flag Investors Communications. "I have a lot of confidence in management, its strategic vision and its acquisitions."