Qwest shares surge on Wall Street

Morgan Stanley Dean Witter analyst Peter Kennedy upgraded the stock to a "strong buy" rating from "outperform."

Qwest shares gained more than 7 percent to close at 74.5625. Shares have traded as high as 70.875 and as low as 22 in the past year. The company's market capitalization is currently valued at more than $25 billion.

"We believe that Qwest is one of the best-managed, best-positioned facilities-based carriers in the telecom sector and appears to be gaining significant momentum," Kennedy wrote in an equity research report.

Kennedy also hiked Qwest's price target to $85 a share from $70 and increased fiscal year 2000 earnings per share estimates to 70 cents from 65 cents.

"Our upgrade is primarily based on acceleration in the company's local strategy and better visibility and confidence in Qwest's international strategy," Kennedy wrote.

Last month Qwest said it had built local networks in 10 U.S. cities and plans to expand into 19 cities by the end of the year. Separately, the company's international joint venture, KPNQwest, is continuing to build fiber optic rings and add customers.

The company, one of several carriers building new national fiber optic networks, has recently expanded its service offerings and has forged ahead with an effort to gain name recognition among consumers.

Qwest began a national marketing campaign last month using advertising agency J. Walter Thompson. In its ads, Qwest calls on potential customers to "ride the light." Fiber optic networks, like the 18,800-mile network Qwest is close to completing, deliver digital voice, video, and data traffic as pulses of light.

The Qwest network, except for a 315-mile addition between Tulsa, Oklahoma, and Memphis, Tennessee, is scheduled to be completed by the end of the second quarter.

Some analysts expect Qwest's profit margins to increase dramatically after the company completes the massive construction project.

"The economies for Qwest will get substantially better once the network is done," said Tom Friedeberg, a telecommunications analyst at Janco Partners. As much as 80 percent of Qwest's profits could come during the second half of the year, Friedeberg estimates.

Other analysts said Qwest may need to tweak its pricing models as increased competition forces the average cost of long distance voice calls and other data traffic to fall.

"Their prospects look good, though it isn't clear that they can keep up pricing the way they have been and really get profitable," said Steve Koppman, an analyst at Dataquest.

Despite much emphasis on the ability of new packet-switched networks to deliver data, much of the company's revenues continues to come from long distance voice traffic. Janco's Friedeberg said some 15 percent of the company's current revenue is from data traffic now--but that number is expected to grow to 25 percent by the end of the year.

The company, which unlike many of its start-up competitors, is targeting both mass market consumers and big business. Earlier this year, Qwest launched new e-commerce and Internet access services.

And, in addition to its involvement with the Internet2 consortium, Qwest has signed deals with Road Runner and Time Warner in recent months.