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Michael Rollins, telecom analyst at Citigroup, on Monday cut his rating on Verizon (VZ) to Sell from Hold, while also increasing his rating on AT&T (T) to Buy from Hold. His basic thesis is that AT&T “has greater earnings power than Verizon over the next three years with a cheaper P/E and P/FCF [free cash flow] valuation” when you factor in completion of the pending AT&T acquisition of BellSouth (BLS).

Why Rollins likes AT&T:

  • BellSouth merger likely to close soon.
  • Expects expanding margins at Cingular, with lower than previously forecast capital spending.
  • Cash and non-cash synergies from the merger should fuel earnings growth.
  • Fiber-to-the-note video strategy lower cost than Verizon’s fiber-to-the-home approach.
  • Could increase dividend, buyback program in 2007.


Why Rollins doesn’t like Verizon:

  • Dilution from Verizon’s FiOS (fiber optic services) IP television initiative “likely to be greater than current guidance.”
  • Wireline operations likely to weigh further on results, with 7.8% line loss this year and 7.2% next year, somewhat less than expected losses for AT&T of 6% this year and 6.2% next year.
  • Expect asset restructuring to be dliutive to earnings.
  • Free cash flow likely to fall below current dividend payout in 2007.
  • Consensus earnings estimates too high.
Source: Citi: Buy AT&T and Sell Verizon