Mergers Lifted Telecom Stocks In 2004

David Ng, 01.12.05, 6:00 AM ET
http://www.forbes.com/2005/01/12/cx_dn_0112telecomscream_print.html

For a few months in late 2004, it seemed like every wireless provider was merging or looking to merge with the competition.

Cingular closed the purchase of AT&T Wireless for $41 billion in late October, creating the No. 1 carrier in the country. Scarcely a month later, rumors began swirling that Sprint (nyse: FON - news - people ) was looking to acquire Nextel Communications (nasdaq: NXTL - news - people ). Merely days later, Verizon Communications (nyse: VZ - news - people ) was also said to be in the bidding for Sprint, or Nextel, or both. But it wasn't to be. On Dec. 15, Sprint formally agreed to acquire Nextel for $36 billion. The deal, scheduled to close in the second half of 2005, will create the country's third-largest wireless carrier.

Such was the year in telecommunications: dynamic, unpredictable and, for the most part, profitable for shareholders. The telecom services sector in the S&P 500 rose 16% in 2004, a considerable improvement over the 3.3% gain in 2003. For the year, the S&P 500 as a whole rose 9%, and telecom services account for only a tiny slice of the index--just 3.27%.

Wireless stocks led the way with an overall gain of 57.3%, though it was down considerably from 2003's 77.7% rise. Analysts say the sector added as many as 20 million subscribers for the year, versus 17.7 million in 2003, raising the penetration rate to more than 60%. Meanwhile, integrated telecommunications stocks rose 9.3%, versus a decline of 4.3% in 2003.

Telecom's top performer was Sprint, up 51.3% for the year. The stock spent most of 2004 below the $20 mark before taking off in November, ending the year at $24.85. This marks the first time in three years the stock has closed above $20, though it is still nowhere near its pre-2001 highs of around $70. Besides the Nextel purchase, Sprint's key drivers for 2004 included a possible deal with Time Warner (nyse: TWX - news - people ) to provide wireless services to cable subscribers, and expectations that revenue will continue to grow into 2005, helped mainly by wireless business.

In second place, Alltel (nyse: AT - news - people ) rose 26.1% for 2004 to end at $58.76, driven by strong earnings throughout the year, as well as its acquisition of certain AT&T Wireless assets from Cingular. Verizon placed third, registering a 15.5% increase for the year to close at $40.51. Both Alltel and Verizon posted most of their gains in the second half of 2004, with Verizon jumping nearly $5 in August on news that it had beat second-quarter estimates.

Rounding out telecom's top five are Citizens Communications (nyse: CZN - news - people ), rising 11% for the year, and CenturyTel (nyse: CTL - news - people ), which rose 8.7%. Meanwhile, SBC Communications (nyse: SBC - news - people ) and BellSouth (nyse: BLS - news - people ), which jointly own Cingular, both posted declines for the year of 1.2% and 1.8%, respectively.

Wireless wasn't the only big telecom story in 2004. The Federal Communications Commission made its presence felt in several fields. It officially classified voice-over-Internet protocol (VoIP) as an interstate service exempt from state regulation. The agency retired the UNE-P rule, which compelled regional Bell operating companies to lease some or all of their lines to competitors. And the FCC continued to push for deregulation in broadband services.

So far, 2005 shows signs of continuing many of the same trends of 2004. Regional Bells will continue losing customers to wireline-to-wireless migrations, with some analysts estimating access line loss in a range of 5% to 6% for the year. Consolidation in wireless is likely to continue in full force, with Alltel announcing this week an agreement to acquire Western Wireless (nasdaq: WWCA - news - people ) in a transaction valued at $6 billion. Analysts expect VoIP subscriber growth of at least 150,000 per quarter, which could rise as high as 300,000 per quarter.

Telecom's Top Five
Company Name 2004 Price Change P/E 2004 Closing Price
Sprint (nyse: FON - news - people ) 51.3% 32.9 24.85
Alltel (nyse: AT - news - people ) 26.1 17.7 58.76
Verizon Communications (nyse: VZ - news - people ) 15.5 33.7 40.51
Citizens Communications (nyse: CZN - news - people ) 11.0 53.3 13.79
CenturyTel (nyse: CTL - news - people ) 8.7 14.5 35.47