Qwest Disputes Analyst’s Data
Morgan Stanley Group downgraded Qwest Communications International Inc. on Wednesday and questioned the voice and data services company’s accounting practices and future earnings power--allegations that Qwest called “inaccurate and misleading.”
Qwest also reaffirmed its growth targets through 2005.
Morgan Stanley analyst Simon Flannery downgraded Qwest to “neutral” from “outperform,” and raised questions about how the company accounted for last year’s acquisition of US West Communications Inc.
He also argued that Qwest may have bolstered its operating income by changing its pension plan assumptions and capitalizing a large amount of software costs.
“The company has taken a number of financial actions that could have an important bearing on the sustainability of future earnings growth,” Flannery said in the report.
He cut Qwest’s earnings estimate for 2002 to 61 cents a share from 78 cents and trimmed the 2003 forecast to 75 cents from $1.04, citing the “lack of visibility stemming from these [accounting] issues and industry weakness.” The 2001 earnings estimate of 58 cents a share was unchanged.
Shares of Qwest fell to $28.39, its lowest level in more than a year, before recovering somewhat to close off $1.25, or 4%, at $30.02, on the New York Stock Exchange.
Qwest lashed back and rebutted Morgan Stanley’s findings in a news release and conference calls with investors, reporters and other analysts.
“There are no accounting issues or improprieties in Qwest’s financial reporting . . . innuendoes on our integrity are not going to be tolerated,” Chairman Joe Nacchio said in a conference call. Nacchio called the Morgan Stanley report “hogwash,” but said “the integrity issue is really what burns my britches.”
The battle comes as Congress examines the independence of brokerage firms’ research analysts. Some legislators have said pressure to attract and retain corporate clients for lucrative investment banking services led many analysts to issue favorable recommendations on stocks or to gloss over bad news.
Nacchio said investors may ask “Isn’t this what investment banks are supposed to do?” by raising questions and probing concerns. But “if I believed that was what was going on here, I’d have to believe in the Easter Bunny,” Nacchio said.
Qwest said it viewed the report as an attack on its integrity, rather than an independent analysis of its finances.
Qwest Chief Financial Officer Robin Szeliga declined to comment on whether the company would pursue legal action against Morgan Stanley, or withhold future investment banking business from the firm.
Flannery did not immediately return calls seeking comment. The investment bank, however, stopped distributing copies of the Qwest research report.
Qwest reiterated that it expects revenue to increase at least 15%, and earnings before interest, taxes, depreciation and amortization to increase about 20% a year through 2005.
