Though much of the communications industry is foundering amid declining profits and a scarcity of investment capital, Qwest posted a profit Tuesday that exceeded Wall Street's expectations.
The quarterly report marked the first since Qwest acquired local phone company US West, creating a combination that includes a long-distance fiber-optic voice and Internet network and Web hosting facilities with traditional Baby Bell local voice and wireless systems.
Although the pairing initially met resistance and criticism, some analysts--and investors, judging by Tuesday's 7 percent midday stock price gains--believe Qwest is a hybrid of communications old and new and, as a result, owns a unique set of assets. The company's solid financial results provide the first evidence of that, some say.
"I think the Street is taking this as an affirmation that you can be a communications company today and have success," said Andrew Hamerling, a senior analyst at Banc of America Securities, referring to the recent communications market downturn.
Companies such as AT&T and WorldCom, two consumer long-distance powerhouses, have faced falling profits and flagging investor confidence in recent months. Likewise, a shortage of investment capital and an ensuing rash of bad news have affected the smaller competitive local phone companies. Investors, analysts and executives throughout the communications sector have expressed concern about spending in the broader communications market.
But while others have seen their stock prices plummet drastically, shares of Qwest and many of the Baby Bell local phone providers have remained relatively stable, by comparison, in recent months.
Qwest executives addressed the strength of the industry and tried to remove their company from the ongoing dialogue about recent communications industry woes.
"The problems with some of the older providers are not endemic of the industry," Nacchio said Tuesday on a conference call. "From our point of view, we think this industry remains strong. Demand remains strong."
Ironically, many investors in recent years have shied away from dividend stocks, such as the Baby Bells, in favor of more Internet-based companies. But now Qwest is a combination of the two, and finicky investors appear more willing to embrace slower-growth companies with sustainable prospects and less volatile stock fluctuations.
"The perception is that the Bells offer stability," Hamerling said. "Qwest has done a good job of taking the cash flows from the Bell and investing them in high-speed Internet and wireless."
Some analysts believe that Qwest's assets are no better than WorldCom's enviable communications properties, for example, but Qwest's comparatively smaller size has allowed the company to react to a changing marketplace more nimbly.
"There was a lot of waste (in US West), and they've gotten rid of it and focused on the growth areas--immediately," said Philip Wohl, a senior investment officer at S&P Equity Group, a financial publisher and adviser. "Qwest has shown results more quickly than others. Nacchio has done so quickly, and as an investor, that gives you confidence, especially in this market.
"People want (AT&T and WorldCom) to change on a dime and they can't," Wohl added.
Qwest executives are hopeful that their company can capitalize on the recent misfortunes of other communications competitors, such as AT&T, which is believed to be considering a major restructuring plan.
"Anytime you have a large company--whether it's AT&T or someone else--that radically shifts strategy, that's going to put the employees and management under extreme pressure for a year or two," said Nacchio, a former AT&T executive. "I think that is only a huge net positive for Qwest."
Analysts broadly applauded the Qwest earnings report Tuesday, with Merrill Lynch, a major investment bank, upgrading the stock to a "buy" rating from an "accumulate" rating. Merrill Lynch also raised its 12-month price target to $70 from $65.
"Through consistent growth in its data/Internet business, we expect Qwest to outpace its incumbent telecom competitors when it comes to overall growth metrics," Merrill Lynch analyst Adam Quinton said in a research report Tuesday morning.
Others said the quick integration of US West, as well as solid earnings, provided they continue, could serve to vindicate Nacchio after the US West deal was widely second-guessed.
"Nacchio is a smart guy. He took a lot of guff for (the US West acquisition), but in the long run I think it's going to be a good thing for them," Wohl said. "Not a great thing, but a good thing."