Wireless Carriers are not Immune to Recession

Let’s conduct a thought experiment. Imagine we are headed for a recession. (Not a big stretch, but whatever.) What happens to the wireless carriers?

Bernstein Research analyst Craig Moffett took a look at that question in a research note today, and for investors in telecom services, the answers he offers are sobering.

For starters, Moffett points out that the wireless carriers are entering a period of slow growth. He notes that wireless penetration is already at 80% in the U.S., and is not likely to exceed 90%. Already, he notes, almost every adult American has a wireless phone, and service is reaching demographic groups once considerable unreachable - like kids under age 10. And while he agrees that data subscriptions will grow rapidly, he contends they will be too small to compensate for the coming slowdown in new subscribers.

And if there is a recession, things could get a bit ugly. Moffett notes that in the 2001 recession, wireless net subscriber growth dropped in half in two years - and that at a time when penetration rates were about 30 percentage points low. “The issue is not whether consumers disconnect their phones in a recession, but rather, whether new consumers can continue to enter the market at the same pace,” he writes. “The wireless segment of the telecom stocks does not appear to discount stability during a recession, but instead sustained growth.”

Moffett contends that slowing growth is already hurting results at low-end providers, including Leap (LEAP), MetroPCS (PCS) and Sprint (S). But he notes that Verizon (VZ) and AT&T (T) have so far held up reasonably well. However, he notes that wireless subscriber growth accounts for more than 90% of wireless revenue growth at Verizon, and more than 100% of revenue growth at AT&T. “We believe a loss of - or even a meaningful decrease in - this source of growth would have a significant impact on sentiment and valuations across the sector,” he writes. “For a proxy of a wireless carrier with no subscriber growth - but with tremendous potential upside from data services - think…Sprint.”

Moffett has Market Perform ratings on AT&T, Verizon and Sprint.

Monday, AT&T is down $1.75, or 4.4%, at $37.80, due in part to the widespread chatter that the company is about to buy EchoStar (DISH). Verizon is off 72 cents, or 1.6%, at $42.97. Sprint is down 44 cents, or 2.9%, at $15.02.