Fearing Wireless Price War, Analysts Cut Estimates on Telcos

Fearing a price war is shaping up in the wireless sector, the Street is dumping telco shares.

Credit Suisse telecom analyst Christopher Larsen Wednesday morning reduced his rating on the telecommunications services sector to Market Weight from Overweight, cutting his stance on AT&T (T) and Verizon (VZ) to Neutral from Outperform. He also trimmed estimates for both Qwest (Q) and Sprint Nextel (S).

Underlying his call: worries that the introduction of new all-you-can-eat flat rate pricing plans from Verizon, AT&T and T-Mobile will trigger “a wireless price war.” He’s also worried about macro factors. “Recently, we have begun to see negative forecast revisions for the industry and feel that greater wireless competition and a weaker economy will have a negative impact on these trends and continue to push revisions downward,” he writes. “We believe Neutral ratings are justified given the higher risk of increasing wireless competition and a difficult economic environment,” though offset in part of larger share repurchases and attractive dividend yields.

Larsen’s estimate cuts:

• Sprint: ‘08 to 49 cents from 52 cents. ‘09 to 31 cents from 46 cents.
• Qwest: ‘09 to 50 cents from 51 cents.
• AT&T: ‘08 to $3.03 from $3.08; ‘09 to $3.44 from $3.51.
• Verizon: ‘08 to $2.55 from $2.66; ‘09 to $2.92 from $3.09.

Meanwhile, UBS telecom analyst John Hodulik Wednesday morning cut his price targets and estimates for both Verizon and AT&T, “to reflect slower growth in wireless.”

Hodulik’s estimate cuts:

• For Verizon, he now sees ‘08 at $2.63, down from $2.70; for ‘09, $2.86, down from $3. His price target drops to $41 from $51.
• For AT&T, he now sees ‘08 at $3.17, down from $3.19, and for ‘09, $3.49, down from $3.58. His price target drops to $41 from $49.

Hodulik says Sprint is likely to launch an unlimited voice plan in the next few weeks is considering pricing at $60-$80 a month. That would be below the $99.99 a month plans now being offered by AT&T, Verizon and T-Mobile. He thinks there is further downside in the stocks if Sprint chooses to price at the low end of the range.

In Wednesday’s trading:

• Sprint is down 34 cents, or 3.7%, at $8.89.
• Qwest is down 8 cents, or 1.5%, at $5.30.
• AT&T is down $2.46, or 6.9%, at $33.43.
• Verizon is down $1.69, or 4.8%, at $33.65.

Update: Robert W. Baird analyst William Power cut his rating on AT&T today to Neutral from Outperform, citing “concerns over greater industry pricing pressure, couple with the recent slowdown in industry postpaid subscriber growth.”