- The Washington Times - Monday, April 5, 2004

It remains a mystery why so many people feel compelled to speak three times as loudly into their cell phones as they would during normal conversation. But there’s no mystery at all as to why investors in wireless service and equipment companies have plenty to shout about in 2004.

The wireless stock group, according to Morningstar Inc., is up more than 36 percent over the past 12 months. That’s almost enough to make you forget the group’s three-year annualized decline of 13 percent.

Behind the run-up: Not only are wireless companies gaining subscribers, with half of Americans now owning cell phones, but more subscribers are using them as their only phones. They are also opting for such premium services as photo and data transfer.

Meanwhile, the effect of last fall’s federal decision to allow customers in the top 100 U.S. markets to switch carriers without needing new phone numbers hasn’t been dramatic. Companies haven’t had to spend a lot to replace lost customers.

The Cingular Wireless deal to purchase AT&T; Wireless Services for $41 billion in February was the major boost to the industry’s stocks. Not only might it trigger more deals, but Cingular is expected to sell parts of the merged company to other providers and might even go public itself.

“The economics of the industry are definitely pointing to more consolidation,” said Tavis McCourt, analyst with Morgan Keegan in Nashville, Tenn.

Mr. McCourt expects further deals, such as Verizon Communications Inc. merging with Sprint PCS or Alltel Corp.

“We think 2004 will see double-digit sales growth and widening profit margins,” added Kenneth Leon, analyst with Standard & Poor’s in New York. “Many of the operators are upgrading their networks for more advanced data and Internet capability.”

Though recent wireless stock gains were dramatic, the investment promise remains. “Investors should keep an eye on this group, for there’s still a lot of growth left,” said Wayne Homren, analyst with Parker Hunter Inc. in Pittsburgh.

We may be approaching the saturation point where everybody who wants a cell phone has one, Mr. Homren said. However, offering new services and improved quality to existing subscribers is a less-expensive way to make money than fighting over new ones.

“Camera phones have really taken off, and we’re going to see a lot more features in the future, such as downloads of audio, video and direct-text transfers within a network,” predicted Kevin Calabrese, analyst with Argus Research in New York, who expects half of all calls to be wireless by the end of 2006.

But wireless stocks should only represent a small speculative portion of a portfolio, because there always are regulatory and market risks.

“Despite somewhat better industry fundamentals, this remains a very unstable environment,” cautioned William Benton, analyst with William Blair & Co. in Chicago. “The group is made up of highly leveraged stocks that move more than the overall market, whether up or down.”

Here are some stocks considered to offer the greatest potential gains:

• Nextel Communications Inc. (NXTL), a wireless provider whose services include a long-distance digital walkie-talkie service, wireless data, Internet access and directory publishing, is attractive, Mr. Calabrese and Mr. Leon believe. Its stock is trading at a low price compared with its earnings, it continues to reduce its debt and its top-line sales are growing 20 percent annually. Its all-digital data network is based on Motorola Inc. integrated digital enhanced network (IDEN) wireless technology.

• Nextel Partners (NXTP), a separate company from Nextel Communications that operates in markets smaller than the top 100 that Nextel Communications itself services, is recommended by Mr. Leon. Nextel Partners has more than 878,000 digital handsets in service in its markets.

• Alltel Corp. (AT), a communications provider that derives 60 percent of revenue from wireless and operates a rural wire-line company, is recommended by Mr. McCourt. It’s a financially conservative company that experienced a turnaround in operations over the past three quarters. It has emphasized its network advantage of having a reciprocal roaming agreement with mighty Verizon.

• Qualcomm Inc. (QCOMM), a wireless-equipment maker that is the leader in the code division multiple-access (CDMA) technology used by Verizon and Sprint, is a stock choice of Mr. Benton and Mr. Leon. Churned customer accounts and customer upgrades greatly benefit the sales of this manufacturer, whose handsets are typically subsidized by the carriers. The company already has an excellent stream of royalties. (William Blair & Co. is a market maker in Qualcomm stock.)

• Nokia Corp. (NOK), the Finnish mobile communication company that manufactures handsets to meet all major standards and markets to customers in 130 countries, is recommended by Mr. Leon. It also makes gaming devices and imaging phones.


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