Michael Rollins, telecom analyst at Citigroup, on Monday cut his rating on Verizon (NYSE:VZ) to Sell from Hold, while also increasing his rating on AT&T (NYSE: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.