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Tuesday, August 01, 2006

AT&T's Low Fiber Diet

Stocks: (T)(BLS)(VZ)

AT&T was the subject of two upgrades (HSBC and Robert W Baird) and a downgrade (Stifel Nicolaus) last week. The debate swirling around the telephone giant has three parts. The first is whether its merger with BellSouth will create company with more leverage with both suppliers and consumers. The second is whether AT&T's "go slow" approach with fiber is better than the rapid buildout of fiber by Verizon. The last is whether AT&T should be trading at the high end of its 52-week range while Verizon trades toward the low end of its.

The market in general seems to favor mergers like the one that AT&T and BellSouth are about to consummate. AT&T's merger with SBC is viewed well on Wall St. The stock now trades at its highest price since early 2003. Cost eliminations and leverage with large telco equipment suppliers have driven economies that have helped AT&T improve margins.

Perhaps the most important decision AT&T has made is to adopt a relatively slow build-out of fiber-to-the-home. Verizon has three million homes going online with the new service and will add three million more next year. Because it is unclear whether consumers will spend more to buy the things that higher spend connections bring, such as IPTV, investors may be more comfortable with the gradual upgrade approach at AT&T.

Verizon's recent results fuel that argument that AT&T may have the better strategy. Even when one-time costs were backed out, Verizon's earnings only moved up from $.63 a year ago to $.64 in the most recent period. Verizon's stock was off 1% on the news.

For the time being, AT&T's premium over Verizon is likely to stay in place. The market likes the scale that the company gains with BellSouth, but is also troubled by the quick pace of the Verizon network upgrade.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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