COMMENTARY -- It may have been a darling of Wall Street lately, but SBC Communications (NYSE: SBC) never stopped being a Baby Bell at heart.
SBC stock dropped more than 13 percent this morning after the communications provider lowered its earnings target for 2001. The company now sees annual earnings growing 11 to 14 percent next year, down a bit from its previous goal of a midteens percentage increase in EPS.
Shares might have been due for a fall anyway. SBC has held up phenomenally well compared to the broader market in the last three months:
As other U.S. telecom firms have sprouted with problems, SBC stood out as the best of the lot in recent quarters. Earnings were reliable, data revenue growth remained strong, and long distance market share gains in early states looked promising. Of all the regional Bell operating companies, SBC appeared to be the one best positioned to establish itself as a nationwide power offering the whole gamut of communications services.
SBC still seems to be in the best position, compared to its peers. Despite the company's lower forecast, demand remains very strong for its core offerings, executives told analysts this morning.
Unfortunately, bringing up DSL service up to quality standards is taking longer than expected in SBC's Ameritech territory, which is the Midwest. Regulators are making it hard for SBC to enter the long distance market in several states, including California.
Most important, SBC is taking down its estimates because of the slowing economy. Analysts and executives on this morning's conference call pointed out that if you take away SBC's calculation of macroeconomic impact, the company would be on track to meet its earlier estimates.
So today's new guidance reflects neither a change in the dynamics of SBC's target markets, nor a lessening of the company's ability to carry out its plans. SBC is merely being careful because of the economy.
CFO Donald Kiernan pointed out SBC's new targets aren't that far from what its original 2001 goals, but expectations had been raised in October.
All things considered, SBC is doing exactly what you might expect from a Baby Bell: being conservative, moving cautiously and keeping expectations down.
The company could fill DSL demand faster if it wanted to, Kiernan told analysts. It is choosing to move at a slower pace.
Not so long ago, that would have annoyed investors and sent them screaming on the message boards. Obviously you're seeing some of that today with the share price decline, but in the current atmosphere, a careful company gets more consideration than it would have last year or earlier this year.
Better safe than sorry sounds boring, but considering the fate of some broadband and communications high-fliers lately, safe sounds great.
You might complain about slow DSL rollouts by SBC, but it's not as if cable Internet access or other DSL vendors are moving all that fast either. In the end, would you rather have SBC or the likes of Covad Communications (Nasdaq: COVD) and Northpoint (Nasdaq: NPNT)? Only a reckless gambler would choose the latter two.
Relatively sluggish competition means SBC can take its time to get things right. If only other companies would do the same. 22GO
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