By Sam Jaffe The telecommunications landscape sure has changed a lot since AT&T (T) was split up in 1983. Of the original six Baby Bell regional local-service providers, only three are left. The hottest stocks are fiber-optics suppliers, not service providers. And the portion of Ma Bell that remained AT&T is undergoing another split-up, this time into four pieces.
But BellSouth (BLS) appears to be plying the same trade it did two decades ago. The Atlanta-based local carrier still provides phone service in the Southeast, and it seems few headwinds move this stock. It fell 12%, to $41 a share, in 2000, vs. a 10% drop in the Standard & Poor's 500-stock index. Of late, the most common news headline about BellSouth is the one that refers to rumors the company is about to be acquired, thanks to stellar management and a stable customer base of 41 million.
GROWTH ENGINE. Meanwhile, fellow Baby Bells have changed dramatically over the past few years. GTE and Bell Atlantic merged to form Verizon Communications (VZ). Another merger united SBC Communications (SBC) and Ameritech. U S West merged with Qwest (Q), a national carrier with a brand-new fiber-optics network. But there's more than meets the eye at quiet, steady BellSouth -- including some enormous investments overseas, especially in Latin America, that could become the main engine of growth in the future.
It's little wonder BellSouth's key international focus is south of the border. The company expects its Latin wireless customer base to increase 30%, to 8 million, in 2001. And that would be just the start. Only 8% of Latin Americans have access to a wire-line phone, which means the potential market is huge. Of course, not every Latin American worker is willing to spend his annual income on a cell phone -- the reason prepaid phones are such a strong seller in the region. Families share a phone with prepaid calling time on it, then either return the phone for a discount or renew the prepayment. Some 70% of wireless customers in Latin America use the prepaid method rather than the subscriber model popular in the U.S. BellSouth gets slightly lower margins because it offers prepaid cell phones, but it has quickly become the No. 1 provider of wireless access in Latin America.
"TREMENDOUS MARGINS." The company's long-term strategy is to provide phone service for the people on both ends of the line for most calls between the U.S. and Latin America. It moved much closer to this goal when it merged its wireless division with SBC's in October, 2000, to form a national wireless company called Cingular. "The ability to originate, transmit, and terminate a call will add tremendous margins," says Gary Jacobi, a Deutsche Banc Alex. Brown analyst who rates the stock a buy.
That's not to say BellSouth is losing money on the rest of its businesses. It produced $13.6 billion in revenue during the first nine months of 2000 from its traditional wire-line services. That business netted the company 45% in operating-profit margins. In addition, this supposedly sickly business saw 10% revenue growth in 2000, and the company expects to see it grow 7% to 9% in 2001.
At the same time, BellSouth predicts overall earnings will grow 10% to 12% this year. Analysts who track the company expect it to earn $2.40 per share in 2001, compared with $2.21 in 2000, according to First Call.
TECHNICAL DELAYS. Another area where BellSouth still has room to grow quickly is digital subscriber line service, which offers Internet users superfast connections. Because of technical delays, the company has been able to offer DSL in just 32% of its coverage area. But BellSouth expects that figure to double this year as it aggressively rolls out the new service. By the end of 2001, the company predicts, it will triple the number of DSL customers it has from 200,000 to 600,000.
The final growth area for the company, which should begin to be tapped in 2001, is long distance. Verizon started selling long distance in New York at the beginning of 2000 and already has more than 2 million customers there. SBC started selling it in Texas in July, 2000, and amassed a million customers in a month. BellSouth expects to win final approval from the Federal Communications Commission to provide long distance to its clients in Georgia, where its second-largest customer base resides after Florida, by this summer at the latest.
"We expect to finish our testing and submit the proposal to the FCC and the Georgia Public Service Commission by April," says spokesman Battcher, who notes that the FCC has 90 days to approve or deny the request. "We've got a checklist of over a thousand items that we want to finish to make sure we give them a report that perfectly meets the letter of the law and their technical specifications."
"THEIRS FOR THE TAKING." Guzman & Co. analyst Patrick Comack, who has a buy rating on BellSouth, estimates that the entire consumer and small-business long-distance market for BellSouth's region is worth $12 billion in revenue a year. He expects BellSouth to gain a huge portion of that business. "The long-distance companies have just given up trying to compete with the Baby Bells in the long-distance market," he says, noting that AT&T, Sprint (FON), and WorldCom (WCOM) are concentrating on Big Business customers. "It's theirs for the taking."
Comack says he knows exactly how much BellSouth's stock is undervalued. He estimates that if the company were split up tomorrow, its U.S. wire-line assets would be worth $35 per share, its 40% stake in Cingular would be worth $15, and its foreign assets would be worth $11 per share. That comes to $61. BellSouth closed on Jan. 4 at $43.
Such a breakup model of valuation is an especially apt way to measure BellSouth's worth because shareholders have already approved the issuance of a tracking stock for its Latin American assets. Battcher suggests investors can expect a similar move for Cingular: "I can't speak for what will happen with Cingular, but I wouldn't be surprised if they were looking into the issuance of public stock very closely."
BellSouth, Battcher says, is only waiting for market conditions to improve (and approval from the Securities & Exchange Commission). In other words, the company will offer tracking stocks to its shareholders once its own stock regains some of its value. At this point, the whole is worth less than the parts. Don't expect that to last for long. Jaffe writes about the markets for Business Week Online in our daily Street Wise column
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