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AT&T shareholders endure the pain, wait for gain

Shares of the phone and cable giant have tanked 45 percent in the past three months, leading some investors to wonder whether it's time to hang up on Ma Bell.

Shares of phone and cable giant AT&T have tanked 45 percent in the past three months, leading some investors to wonder whether it's time to hang up on Ma Bell.

After reaching $60.31 on March 27, shares of AT&T closed Friday at $33.44. At one point during the day, the shares dipped to $33, a 52-week low and approximately the price the shares fetched in the winter of 1997.

The cause is fairly easy to understand: AT&T faces tremendous competition in its core market from old rivals and new technologies. In the first quarter, revenues from its bread-and-butter consumer long-distance service fell to $5.06 billion from $5.47 billion in the year-ago quarter and $5.33 billion from the previous quarter.

As a result, the company is spending a fortune to tap new sources of revenue. It's a strategy that is very costly in the short term, say analysts, and has no guaranteed long-term payoff.

For example, AT&T last week closed its $44 billion merger with MediaOne Group after a long, drawn-out wrangle with the Justice Department over antitrust issues.

"In order to turn this company around, (CEO Michael) Armstrong has sacrificed short-term earnings in a major way," said Patrick Comack, a senior analyst at Guzman & Co. "Their newer investments are long term, but their (core) long-distance business is declining, and that could accelerate."

Along with the MediaOne acquisition, AT&T has purchased cable operator Tele-Communications Inc. (TCI) and taken a majority stake in Excite@Home in a bid to establish a presence in the broadband arena and solidify its Internet strategy. The company has also bought a stake in Net2Phone, a provider of integrated Internet and voice technologies.

The shopping spree see story: AT&T-MediaOne merger OK'd has seriously crimped AT&T's bottom line. According to First Call, analysts expect the company to post earnings of $1.80 a share this year. Excluding the effect of the acquisitions and the company's sagging phone business, some analysts say AT&T would have posted earnings in a range of $2.70 to $2.75 a share.

"It's a long-term story with short-term costs," said Comack of management's quest to transform AT&T into a diversified telecom giant.

But for now, AT&T is still a phone company. About $11.2 billion of the $15.8 billion in first-quarter revenue came from voice and data transmitted over phone networks.

And the traditional phone will not be a profit goldmine in the near future because of stiff competition. AT&T recently phased out a $3 access fee on some consumer calling plans. "That's $90 million in lost revenue per month," said Drake Johnstone, an analyst at Davenport & Co. in Richmond, Va.

The company tried to make up for the shortfall with a per-minute rate hike, but consumer groups and the Federal Communications Commission howled, forcing the company to backpedal. In short, AT&T has to raise prices, but it's difficult because of brutal price competition.

So investors are looking for other business units to pick up the slack. AT&T's wireless unit grew nearly 41 percent during the last quarter from the year-ago quarter, with $2.2 billion in revenue--a good start, but a far cry from the $5.1 billion and $7.1 billion generated from the company's consumer and business phone-service units, respectively.

"The company needs to generate more profit through its wireless division, but that will be more difficult as SBC, BellSouth and Verizon offer competitive rate plans of their own," said Bruce Roberts, an analyst at Dresdner Klienwort Benson.

Investors also are see story: AT&T consolidates control over
Excite@Homelooking for results from AT&T's cable acquisitions. The company's broadband cable unit posted $1.5 billion in sales but expanded by just 8 percent in the last quarter.

AT&T has told Wall Street analysts that it aims to boost the number of people using its cable lines to send phone calls from about 40,000 at the end of the first quarter to between 400,000 and 500,000 by year's end.

Some analysts are doubtful of such ambitious growth, however. Johnstone believes adding that many customers in such a short time frame will be very difficult. "It's no slam dunk," he said. "I'm not saying that it's impossible, but it's going to require excellent execution."

Johnstone placed the company's odds for success at 50-50, adding that the aggressive marketing needed to meet that objective could dent the company's cash flow. Factor in the sluggish long-distance business, and "I wouldn't be surprised if earnings guidance was pushed down again," he said.

Others agree it's possible that more bad news could be on the horizon. AT&T's consumer and business phone services "could again be worse than Wall Street expected," Roberts said.

While the transition has been expensive and perilous, AT&T employees and shareholders would have paid a steep price if the company remained a traditional phone business. "If (Armstrong) didn't make those investments in cable and wireless, the stock would be in the single digits," Comack said.

Some analysts like the company's chances. With the acquisitions, AT&T will be able to offer a broad family of services to consumers at attractive prices, giving it an advantage against other phone companies with more limited menus.

"If AT&T can successfully develop each of its individual businesses and layer on the capability to knit together its family of services, then its capability to deliver an integrated offering across all market sectors could be unrivaled," analyst Frank Governali of Goldman Sachs wrote in a recent report.

"No other carrier has the potential to address so many market segments so broadly with so many products," reported Governali, who has the stock on his "recommended" list.

When considering whether to buy, sell or hold AT&T shares, investors must consider their threshold for short-term pain against the possibility of long-term gains, analysts said.

"We think the stock is a steal at these levels," said Doug Christopher at Crowell Weadon, "but AT&T's business is changing."