Analyst Expects AT&T; Stock to Begin Rebound
After a 72% slide in AT&T; Corp. shares that wiped out $163 billion in market value, brokerage Morgan Stanley Dean Witter & Co. says the rout is over.
Analyst Simon Flannery said Tuesday that AT&T; shares may double in the next 12 months as the company cuts costs at its cable TV business and analysts stop lowering their profit forecasts.
Investors also will begin to see more value in AT&T;’s separate businesses as the company prepares to break into three by 2002, with a tracking stock for the consumer long-distance business, Flannery said.
He lifted his rating on AT&T; two notches to “strong buy” from “neutral.” He is only the third analyst to raise his rating on the largest U.S. long-distance telephone and cable TV provider in the last year.
“The valuation has come down to the point where we feel comfortable recommending it,” said Flannery, who was rated No. 1 among Latin American telecommunications analysts for three years in Institutional Investor’s annual survey of money managers before he began to cover U.S. telecom companies in 1999.
Flannery said AT&T; shares could reach $35 in 12 months and may be worth as much as $40.
The stock jumped $2.44 on Tuesday, or 12.2%, to $22.50 on the New York Stock Exchange.
AT&T;’s rivals also rose Tuesday. WorldCom (WCOM) gained $1.63 to $19.81, and Sprint FON (FON) rose 94 cents to $25.94.
Flannery said the case for AT&T;’s shares has gotten more bullish as analysts’ expectations have come down. At the end of August, analysts surveyed by First Call/Thomson Financial expected AT&T; to earn $1.74 a share in 2001. Now, the average estimate has declined to 85 cents.
“People aren’t expecting a lot from the stock,” said Flannery, who expects the shares to rally soon because “people tend to look around for ideas and beaten-down stocks at the beginning of the year.”
In the first six trading sessions of this year, AT&T; (ticker symbol: T) has jumped 30% from $17.25 on Dec. 29.
Also gaining Tuesday was AT&T; Wireless (AWE), the tracking stock for AT&T;’s wireless businesses. It rose $2.75 to $22.75.
Flannery has rated AT&T; “neutral” since he began covering the stock for Morgan Stanley in 1999.
AT&T; carries more than $60 billion in debt. Standard & Poor’s recently cut the company’s debt rating and could do so again, Flannery warned. He also expects AT&T; to cut its profit forecasts for this year in the coming weeks.
Still, those risks are priced into the stock, Flannery said. The company’s cost-cutting program will mean higher gross profit margins in its MediaOne Group and Tele-Communications Inc. cable TV businesses. He also expects growth at AT&T;’s wireless business to help drive the stock over the next six to nine months.
Some investors are skeptical of Flannery’s call and say AT&T; doesn’t provide any better value now, even at a cheaper share price.
“I’d say it’s a brave call. I wouldn’t yet be quite so optimistic,” said Brian Bruce, director of global investments at Boston-based Panagora Asset Management, which held 1.5 million AT&T; shares in September.
The wireless business in particular is “incredibly competitive,” Bruce said, and it’s not clear how successful AT&T;’s management will be running it.
“It’s one thing to have potential and another to realize it, and I haven’t seen anything that convinces me that the current management can execute its plans to shore up the business,” he said. Bruce wouldn’t say whether the firm had sold any of its AT&T; shares.
“There’s still easier money to be made elsewhere,” said Jean-Marc Berteaux, who helps manage $4 billion at John Hancock Funds. “I still feel very uncomfortable about potential outcomes with cable and long-distance that I can’t resolve despite the strong upgrade.”
Berteaux said he’s had those concerns for a while: “It’s been over my dead body that we’d own AT&T; over the past two years.”
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Right Number?
AT&T; shares have begun to rebound this year after falling in December to their lowest level since the early ‘90s.
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AT&T; shares on the New York Stock Exchange, quarterly closes and latest
Tuesday: $22.50, up $2.44
Source: Bloomberg News
