Phone Stocks Dive as Long-Distance Firms Feel Squeeze

Telephone company stocks plunged Friday, with MCI Communications losing a full one-fourth of its value amid growing investor concern that the nation’s long-distance carriers could falter under the strain of increasing competition and a slipping economy.

MCI’s stock fell a whopping $7.375 per share Friday to close at $22.625 in over-the-counting trading, leaving it with a massive two-day loss of about 29%. The stock had fallen $1.875 per share Thursday in anticipation of news released later that day that the firm would lay off up to 1,500 workers over the next six months in a consolidation aimed at trimming costs and coping with escalating competition from archrival American Telephone & Telegraph.

MCI, the nation’s second-largest long-distance carrier, also had acknowledged Thursday for the first time that its once-soaring revenue growth--which had made its stock an investor favorite--has slowed as a result of the economy’s drop and more aggressive consumer marketing from AT&T.;

MCI’s stock plunge also pulled down the stocks of AT&T; and United Telecom. AT&T;, the nation’s most widely held stock, dropped $1.125 per share on Friday to close at $32. It was the most active issue on the New York Stock Exchange, with more than 3.7 million shares changing hands. United Telecom, the majority owner of US Sprint, the No. 3 long-distance carrier, fell $2.875 per share to close at $22.50.

The heart of the problem for the carriers, analysts said, is the slowing growth of the long-distance market caused by recession fears, primarily among jittery and cost-conscious consumers.

Analysts said the Big Three are already involved in a major and costly fight to steal residential-service market share from one another to compensate for slowing overall market growth. And they predicted that the fight--which AT&T; is dominating so far--would escalate, increasing marketing costs and eroding profits.

The current situation underscores how dependent long-distance carriers have become on rapidly increasing telephone usage for their revenue growth--and how their operations can teeter when the growth rate slows.

Long-distance phone use has grown steadily every year since the end of World War II, growing dramatically in the last five years. However, usage charges have steadily declined since 1984 with the opening of competition into what was once AT&T;’s monopoly market.

For example, Americans’ long-distance usage has doubled in six years, totaling 75.2 billion minutes between April and June of this year, compared to only 37.5 billion minutes from July through September of 1984, according to Federal Communications Commission records.

But at the same time, the cost of a five-minute call from Los Angeles to Washington fell to $1.24 this year from $2.70 in 1984.

Mariane Bye, a telecommunications analyst at Shearson Lehman Bros. in New York, said Wall Street became nervous after MCI executives gave analysts a gloomy outlook for the final three months of the year in a private briefing late Thursday. The company told analysts that October revenue was stagnant and fourth-quarter revenue might not exceed that of the third period, Bye said.

Bye said the warning about a flat fourth quarter was immediately interpreted as an admission from MCI that its market share is falling. That’s because the fourth period will include a full three months of revenue from Telecom U.S.A., MCI’s recent acquisition, while the third period included only a portion of the newly acquired company’s sales.

“We are prepared for a very tough quarter,” Bye said.

Analysts said MCI’s slowing revenue demonstrates the impact of AT&T;’s newly aggressive campaign to regain market share that it has steadily lost to MCI and US Sprint since 1984.

“AT&T; has drawn a line in the sand, and it will cost everyone a ton of money to cross that line,” Jack Grubman, an analyst at Paine Webber in New York, told news services.

Gene Gabbard, MCI’s chief financial officer, said the carrier’s residential customers are making fewer long-distance calls and business usage has not increased to cover the slack. “The competition and negative advertising is having an impact on us,” he said in an interview.

MCI TAKES A HIT

Friday: $22.63, down $7.38