Exactly how much is the future worth in dollars and cents?
That's the question raised not only by the recent $48 billion AT&T Corp. deal to buy the Tele-Communications Inc. cable company, but by hefty prices being paid by investors for many stocks of cable, telecommunications, software and computer firms these days.Such investments with their anchors hooked into the somewhat murky future typically cost a lot because they're based on hopes and dreams of a better technological place. They're also often as unpredictable as a quick cruise to Gilligan's Island on the Minnow, with passengers basking in the sunlight one day and washing up on the shore the next.
Even cable and telecommunications experts offer up varying degrees of confidence about what the huge AT&T/TCI deal scheduled to close in about nine months means to the average investor. It's designed to provide consumers with local, long distance and wireless services, as well as cable television and dial-up Internet access.
Some say it's a bellwether deal from heaven.
"You can easily justify prices being paid for the cable stocks even now, for a strategic buyer could come in and pay a lot more for them and still make it all work," believes Doug Shapiro, cable analyst with Deutsche Bank Securities. "You'd need to have someone come in to combine operations with their own, building synergies and providing higher penetration of the bundled services."
The AT&T/TCI deal makes a lot of sense, Shapiro contends, and he expects similar deals to take place. Because cable companies tend to perform as a group, he favors a marketbasket approach rather than making a bet on any one single stock.
"This is the seminal deal in media and communications for the last decade, with implications for virtually every company in media, entertainment, communications and information," declared Alan Gould, cable analyst with Gerard Klauer Mattison, who's convinced that cable is the best pipeline into the home. "Within two years, it will accelerate the rollout of telephony, high-speed data and digital video, with a dramatic impact on the choices available to virtually every consumer."
He expects Cablevision Systems to be the next to align with a telephone company because TCI already owns 36 percent of the equity of the company and because it has a strategic presence with the bulk of its 3.4 million subscribers located in the New York area. Comcast, he believes, may be the least likely to combine with someone because the Roberts family, which has majority ownership, doesn't appear interested in selling right now. The new AT&T deal does underscore the long-term shrewdness of Microsoft's $1 billion investment in Comcast last year.
"I think the chance is 90 percent that the AT&T/TCI deal closes, and it is the kernel around which you have a nationwide competing network that should have as good technology as the telephone companies once it is fully upgraded," added Anna-Maria Kovacs, telecommunications analyst with Janney Montgomery Scott in Philadelphia. "Other telecom companies are going to have to get into the cable business to get themselves national and get themselves a broad array of products."
But be careful about extending AT&T's largesse to all other telecom firms, some analysts warn.
"To justify the premium it's paying, AT&T is counting on being able to increase penetration in the basic cable business using the AT&T name and cross-selling to existing long-distance customers," said Anthony Ferrugia, telecommunications analyst with A.G. Edwards & Sons Inc. in St. Louis. "Because AT&T's incentive and size is greater than anybody else's, I'd caution against extrapolating these same valuations to other companies and automatically expecting a price of 16 times cash flow on a cable company."
Synergies in the form of combined advertising budgets and operations are an additional benefit of the AT&T/TCI deal, he noted.
All that said, and with rapidly inflating stock prices a given, there are positive, albeit speculative, recommendations among both the cable and telecom stocks for investors who are believers in the whole "come together" scenario.
Among cable companies, Comcast with its 4.4 million subscribers and a control option on Jones Intercable's 1 million subscribers is recommended for purchase by Gould, Kovacks and Shapiro.
Media One and Cox Communications are also suggested by Shapiro, while TCI is a Gould pick. Because their stock is so expensive, Gould has hold ratings on Cox, U.S. West Media Group and TCA Cable.
Hold AT&T and sell MCI Communications, Kovacks urges, while among regionals she'd buy Bell Atlantic and BellSouth. From among the smaller phone companies, she likes Frontier Corp. She'd also hold regionals SBC and Ameritech. Ferrugia suggests buying shares of Sprint in long distance while holding AT&T and buying Ameritech and SBC among the regionals.