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Sprint sees upside on ATM news

Its stock climbs on news of its lower-cost network for voice, video, and data--another sign of a rebound for the long distance carrier.

Sprint's stock climbed higher on news of its lower-cost ATM network for voice, video, and data--another sign of a rebound by the nation's No. 3 long distance carrier.

In midday trading, the company's shares were trading up 0.25 to 72.1875, just short of the company's 52-week high. Sprint stock has been on a steady climb during the past year--joining AT&T, MCI Communications, and WorldCom on an upward trajectory.

The company has been mired in an uphill battle since industry deregulation two years ago, facing competition from bigger telcos like AT&T, the prospect of a merged MCI and WorldCom, and combinations among Baby Bells such as Nynex and Bell Atlantic, as well as SBC Communications, Pacific Bell, and Ameritech. Despite its No. 3 ranking in the long distance market, Sprint has been rumored to be a buyout candidate because of its previously sluggish stock price.

The telco's bet on any new technology network carries risks, however. A massive frame-relay outage at AT&T last month is just one reminder. In addition, Sprint faces risks from a decision last month to take ownership and management control of Sprint PCS, its wireless joint venture.

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But analysts have been getting more bullish on the company, which is perhaps best known for its spokeswoman, actress Candace Bergen as the "dime lady." Under chief executive William Esrey, the company has been focusing on cost-cutting, a strategy to tap the local market, and reinvigorated marketing efforts, among other plans. Brokerage firms including Donaldson, Lufkin & Jenrette, A.G. Edwards, and Sanford Bernstein recently have upgraded their ratings on the stock.

"In a nutshell, I'm very bullish on PCS [wireless], and on any company that can provide a package of bundled goods" as Sprint can, said Alan Feldman, an analyst with Sands Brothers, who recently initiated coverage of the telco with a positive rating. "They have a high-quality network, and today's announcement shows they're going to leverage that network into the local area."

Still, some analysts wonder if it might be time to "realize some profits" on Sprint, given the recent runup of its stock price, as Argus Research analyst Eric Melloul put it. He wonders about the dilutive effect on earnings of Sprint's wireless rollout, for example. Melloul has a "hold" on the stock.

Other telcos downplayed their competitor's rollout. In a statement, Bell South said Sprint's announcement "reinforces what Bell South has been doing at the local level for the last four years."

In New York today, Esrey likened Sprint's ATM network to a "Big Bang that expands the universe of what telecommunications can do." Hyperbole aside, the network is a convenient way to bring users voice, video, and data simultaneously through a single connection. It also is cheaper than the alternatives: Sprint said the network cost to deliver a typical voice call will drop by more than 70 percent.

Sprint's network is based on asynchronous transfer mode, or ATM, technology. After a sluggish start, the technology now is being more widely used. The company already has spent more than $2 billion on the network and will spend an additional $400 million during the next two years. The service will be available starting next year.

Spending on the network will dilute Sprint's earnings by 20 cents to 25 cents a share this year, and by 60 cents a share in both 1999 and 2000. But the company says the network will move into the black in cash flow and earnings in 2001. Maintenance costs also will decline by as much as 50 percent.

In addition to its ATM service, Sprint has been building out a wireless communications network. Its Sprint PCS business operates in 135 markets nationally, focusing on providing "anytime, anywhere" communications to users. The wireless system could help the company provide local phone service to users, akin to a strategy currently being pursued by AT&T.

Sprint had shared an interest in PCS with Tele-Communications Incorporated, Comcast, and Cox Communications, but the parties had some differences about how to jointly offer the service. Last month, Sprint said it would assume management control, while the cable TV giants would hold a minority stake in the venture. Sprint PCS plans a public offering this summer, after which it plans to trade as two stocks: one which tracks local and long distance businesses, and the other for wireless.

On the Internet front, Sprint struck a deal in February to combine its Internet access operations with EarthLink. Under the terms of the deal, Sprint would get a 30 percent stake in EarthLink.

Last week, the telco said it would extend its $45-per-share tender offer for 1.25 million shares of EarthLink stock until June 5. Many analysts praised the deal, arguing that Sprint was cutting its risk in the highly competitive Net access market. Although the company's service seems like a natural for phone companies, many of them have had difficulty marketing and promoting themselves as ISPs.

Reuters contributed to this report.