SBC Signal Not Clear; Union Pacific Rolling Into Economic Fog
SBC Communications (SBC)
Jim: Don’t buy
Mike: Don’t buy
*
Jim: SBC Communications isn’t a household name in Southern California, Michael, but everyone’s familiar with its main division here--an outfit called Pacific Bell.
Mike: Yeah, in the same way that a company named Vivendi is a closed book to anyone outside France, but we all know its big California property--Universal Studios.
Jim: SBC, formerly Southwestern Bell, started as one of the Baby Bells created by the breakup of AT&T--the; first breakup, that is, in 1984. Since then SBC, like its siblings, has been busy buying lots of other companies. That includes Pacific Telesis, the old parent of Pacific Bell. It also bought Ameritech.
Mike: Doesn’t it seem to you that eventually one Baby Bell is going to end up with all of these phone companies? Then we’ll need another federal judge to break it all up again.
Jim: For now, SBC is still mainly an owner of local phone companies across the United States. Based in San Antonio, it has annual revenue of about $50 billion. But to survive in the long run it wants to be much bigger in such wonderful new worlds as long distance. . . .
Mike: That’s a wonderful new world? I thought that was the horrible old world!
Jim: Glad you spot sarcasm when you hear it. Anyway, SBC wants to be a larger player in long distance and wireless communications and it wants to expand nationally. Though first I wish it would tell PacBell to come up with a phone bill that doesn’t resemble a “Where’s Waldo?” picture.
Mike: You know, this amazes me. Wall Street has hammered the stocks of the dominant long-distance carriers, such as AT&T; and WorldCom, because their revenues from long-distance are going south faster than the credit ratings of PG&E; and Southern California Edison.
Jim: I knew you’d work the other utilities in here somehow.
Mike: Yet I keep reading that SBC is a “buy” because it’s expanding in the long-distance market. What am I missing?
Jim: You’re reading comments from overly optimistic analysts. Anyway, SBC in July got permission to offer long-distance to its Texas customers, and on Monday the Federal Communications Commission approved SBC’s entry into the long-distance market in Kansas and Oklahoma.
Now the company is pressing for the same opportunity in California--assuming there’s still enough juice to power the phones when it gets the green light.
Mike: Great, so SBC will have the right to collect, what, 5 cents a minute or less for this commodity business of long-distance?
Jim: Obviously, they think they’ll make it up on volume. That’s a line investors have heard from more than a few companies over the years.
Mike: Then there’s the praise SBC gets for its “proven record” of execution. On the evidence, that’s because, in Texas, SBC is famous for having--and I’m being charitable here--a great relationship with the state Public Utilities Commission. The commissioners have traditionally given this company everything it wants, including regulations that tend to keep out-of-state competitors at bay. My question is: Will SBC get that sort of ride in other states?
Jim: I have a different question, speaking of execution. Remember a few months ago when PacBell rolled out its DSL service--you know, this new broadband, high-speed telecommunications service? Things got so gummed up, and its customers were so angry that it made all the papers. I know there’s a DSL backlog at every provider, but it gives me pause about SBC’s ability to execute companywide.
Mike: So what about the stock?
Jim: It has gained about 14% over the last 12 months, and it’s priced at about 20 times estimated 2001 earnings per share. That’s better than the general market. But I’d avoid this stock. In mid-December SBC lowered its sales and earnings expectations for 2001, in part citing expansion costs and delays in offering new services.
Mike: I’d avoid it too. There has been a lot of chatter about “one-stop shopping for all your telecommunications needs,” and how these “integrated” companies were going to make themselves and their investors rich. Guess what? In recent months these companies have effectively said: “Well, we’ve discovered that this integration thing is a lot harder to put over than we thought. So instead of integrating, we’re now disintegrating.”
Union Pacific (UNP)
Jim: Don’t buy
Mike: Don’t buy
*
Mike: There’s a stock-market axiom that Union Pacific brings to mind, Jim. It’s called the Dow Theory.
Jim: Enlighten us.
Mike: As I’m sure you know, it posits that if the famed Dow Jones industrial average hits a new high, it has to be “confirmed” by a similar new high in the Dow Jones transportation average to really signal that the overall market is heading higher.
Jim: You know, I was sure you were going to start off discussing Union Pacific’s role in the “golden spike” instead.
Mike: Yes, UP was one of the spikes, so to speak--one of the two lines that united the country when they completed the first transcontinental railroad near Promontory Point, Utah.
But getting back to the Dow Theory, the idea is that it’s one thing for manufacturing to be hitting on all cylinders, but it’s not really convincing unless people are buying those goods, thus requiring that producers ship their products all over the country, benefiting the transportation companies. If they’re both in high gear, then you’ve got something.
Jim: A good point, Mike, because Union Pacific--and several other transportation companies--are clearly indicating that there’s a slowdown in the economy. Even so, there’s no question that Union Pacific is a lot healthier than it was a couple of years ago.
Mike: That’s an understatement.
Jim: But I have to admit to having problems with this stock, mainly because Union Pacific itself just posted a 35% drop in fourth-quarter profit. Why? Because the economic slowdown means it’s hauling less lumber and fewer chemicals and automobiles. And there’s no reason to think those shipments will pick up to any great degree within the next six months, at least.
Mike: Still, to borrow a thought from our SBC chat, don’t you have a lot of respect for Union Pacific’s ability to execute?
Jim: It’s not like you to be so facetious. This is indeed the company that gave new meaning to the words “train wreck” in ‘97-’98 when its service got so messed up it almost brought interstate commerce to a standstill. The problems started after Union Pacific bought the Southern Pacific railroad, and the snafus stemming from that marriage effectively created gridlock at the company for a time.
Mike: Huge shipping centers such as the Southern California ports, Houston and Omaha all came to resemble the Hollywood Freeway at rush hour. Nothing moved even though--or perhaps because--the merger created a company with something like 53,000 employees and 7,000 locomotives.
Jim: And there were some fatal accidents involving Union Pacific trains that made matters even worse. But its chairman, Richard Davidson, eventually pulled the company out of that mess and, to his credit, has made Union Pacific a much better operation.
Mike: So he put Union Pacific in that nightmare and then got ‘em out.
Jim: Right. Union Pacific’s stock has jumped 50% since March. Credit the company’s rebound for part of that, though I suspect it also reflects investors looking for “old economy” stocks in the face of the tech wreck last year. But for me the ride is over for Union Pacific, at least for now. And you?
Mike: I agree. This is the essence of a “cyclical” stock, and I’d argue that our cyclist has crested the hill. I just don’t see how Union Pacific can escape the consequences of the economy’s slowdown for at least the next two quarters.
Jim: The stock isn’t that expensive--it trades for only about 12 times Union Pacific’s expected per-share profit for 2001. And I’m sure there are some who might speculate that the economy is merely pausing, which might make Union Pacific a buy. But no one knows whether that’s the case or a recession is looming. Either way, I’m not willing to guess with Union Pacific’s stock right now.
*
Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.
You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).
