Qwest may be rising out of its painful slump

Earlier this year, Qwest Communications, the smallest of the four Bell companies, was the whipping boy of the phone industry. The company had lost a nasty and protracted bidding war for MCI that only highlighted its failings compared with its larger rival, Verizon.

Unlike the other Bells, Qwest does not have its own wireless network but relies on Sprint to provide service. Qwest is heavily in debt and its long-distance wholesale business has been sagging. It has also been playing catch-up in the broadband market.

But lately, investors have warmed to Qwest.

Since falling to $3.57 on June 23, shares of Qwest have jumped more than 40 percent, closing Tuesday at $5.17. Of course, that is still a long way down from the $60 level the stock reached before the bubble in telecommunications popped. But the recent run-up outshines by far its Bell rivals: shares of Verizon have declined 7.3 percent over the same period; shares of AT&T, formerly SBC, are up 6 percent.

Indeed, it is Qwest that has given shareholders the most to talk about. Initially, investors were relieved that Qwest did not continue bidding for MCI. The company had raised its offer several times to dangerously high levels given its heavy debt load of about $17 billion. Some analysts worried that MCI, had it been acquired, would have compounded Qwest's troubles.

The company has also resolved a number of issues, most notably a class-action lawsuit by shareholders who lost money when Qwest's shares tumbled after accusations of fraud at the company starting in the late 1990s. On Nov. 1, Qwest offered to pay $400 million to resolve the suits.

Other lawsuits remain, but the company has moved to get its balance sheet in order. Earlier this month, Qwest said it would issue $1.1 billion in convertible bonds with a coupon rate of 3.5 percent and use the proceeds, along with other cash, to buy back $3 billion in bonds that pay 13 percent to 14 percent interest.

The swap will help the company reduce its interest payments by about $300 million in 2006 and raise the company's free cash to about $1.3 billion, according to Jeffrey Halpern, who covers Qwest for Sanford C. Bernstein & Co. "It takes away one more layer of concern in the market about their future," said Halpern, who has had a buy rating on Qwest since March 2004.

Only four analysts out of the 26 covering Qwest have a buy rating on the stock, according to Bloomberg. The recent recovery in Qwest's stock provides some comfort to Bill Miller, the money manager famous for outpacing the Standard & Poor's 500-stock index 14 consecutive years with his Legg Mason Value Trust Fund, which is a major Qwest shareholder.