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Sprint 4Q estimates cut
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November 2, 2000: 4:00 p.m. ET
Long-distance pricing issues expected to weigh on U.S. telecom company
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NEW YORK (CNNfn) - A top telecom analyst lowered his fourth-quarter and 2001 earnings estimates for Sprint Corp. Thursday because of increased pricing pressure in the U.S. long-distance market, while also predicting the company may soon become an acquisition target again.
Analyst Dan Reingold, of Credit Suisse First Boston, cut fourth-quarter estimates for Sprint Corp. by 3 cents to 41 cents a share, and expects the company to earn $1.87 a share for 2000, down from prior predictions of $1.90. Earnings tracker First Call had expected a profit of 46 cents for fourth quarter and $1.90 for full fiscal 2000.
Reingold also cut expectations for next year by 25 cents to $1.85 a share, and anticipates long-distance revenue to grow by 2 percent, instead of the expected 3 percent. First Call expects a profit of $2.13 for 2001.
 Reingold cited WorldCom Corp.'s disclosure Wednesday that pricing pressures in the long-distance market were more severe than expected. Reingold lowered Sprint to a buy rating from a hold, since Sprint Corp. (FON: Research, Estimates), the No.3 U.S. long-distance provider, continues to represent a possible take-out candidate for players such as Qwest Communications International Inc., which he thinks is more likely, or Bell South.
Clinton, Miss.-based WorldCom (WCOM: Research, Estimates), the second largest U.S. long-distance provider, unveiled plans Wednesday that would split the firm in two and resend the former MCI long-distance business back into the public marketplace. The telecom also lowered its earnings and revenue guidance Wednesday for the fourth quarter and for 2001.
WorldCom's plans also follows an announcement by AT&T Corp. (T: Research, Estimates), the No.1 U.S. long-distance provider, that it would divide into four publicly-traded companies. Both companies are trying to focus on high-growth operations by separating its slow-growth long-distance businesses.
"This [downgrade] doesn't surprise given problems with AT&T, WorldCom and that sector," said analyst Drake Johnstone, of Davenport & Co.
Cash cows
Shares for the telecom sector have plummeted in recent months. Sprint Corp. is trading at less than it 52-week high of $75.93, WorldCom is trading at less than one-third its year high of $61.33, and AT&T Corp. is also considerably below its highs.
Analysts have routinely criticized both AT&T and Worldcom for failing to keep up with such rivals as Verizon Communications (VZ: Research, Estimates) and SBC Communications Inc. (SBC: Research, Estimates).
Both AT&T and WorldCom have given up growing their long-distance operations and will use the units to generate cash, Johnstone said.
 WorldCom is still reeling from its failed $129 billion merger with Sprint Corp. when both companies declined to comply with conditions imposed by the Department of Justice. Sprint is now considered an attractive take over candidate given its strong Internet backbone and nationwide PCS wireless unit, said CSFB's Reingold.
Of the three major incumbent long-distance players -- WorldCom, AT&T Corp. and Sprint -- Sprint has the least exposure to voice long-distance service, as it only comprises 44 percent of Sprint's total revenue. By comparison, voice long-distance is 52 percent of AT&T revenue and 64 percent of WorldCom's.
However, if Sprint does report a decline in profitability, analysts do not believe buyers will be lining up.
"If revenue growth is declining in long distance, why would a company want to acquire [Sprint]?" said Johnstone.
Instead, he believes that potential acquirers, such as Qwest Communications International Inc., might be better off staying away from Sprint. Qwest, the No. 4 U.S. long-distance phone company, is in an enviable position because long distance is only 15 percent of total revenue.
"Long-distance is a growth business for Qwest but not their focus," Johnstone said.
If Qwest (Q: Research, Estimates) were to buy Sprint, it could put them in the same position as WorldCom or AT&T, Johnstone said.
"Better to have small market share than to be an incumbent with a large revenue base where you may actually see declines from competitors like Verizon and other local phone companies," he said.
Sprint declined to comment on the CSFB downgrade and said it will address financial targets and strategies at its analysts conference on Friday.
WorldCom fell by $1.44 to $17.50 in late trading Thursday, Sprint Corp. (FON: Research, Estimates) dropped by 38 cents to $22.63, AT&T Corp. slid 25 cents to $21. 75 and Sprint PCS, the wireless unit, fell by 63 cents to $36.38. 
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