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In Focus: BellSouth
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November 17, 2000: 3:57 p.m. ET
Telecommunications analyst Drake Johnstone comments on Bellsouth
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NEW YORK (CNNfn) - Investors are giving BellSouth Corp. the cold shoulder this week, despite the company's projections for double digit earnings growth this year and next. Drake Johnstone, telecommunications analyst at Davenport & Co. visited CNNfn to discuss BellSouth's future.
Shares of the regional phone carrier tumbled Friday after the company said that costs of expanding its Digital Subscriber Line service and wireless services in Latin America would cause its earnings growth in 2001 to be lower than analysts had forecast.
CNNfn: BellSouth reiterated its guidance of 10 percent to 12 percent earnings per share (EPS) growth for 2000. Is that a positive sign?
Johnstone: People didn't think BellSouth had problems this year, so that wasn't what they focused on. The stock is down because they lowered next year's earnings guidance due to dilution from aggressive, stepped-up investment in data services, and specifically their planned ramp-up in DSL services.
CNNfn:  For 2001, BellSouth cut revenue growth projections to the 7 percent to 9 percent range and EPS growth is expected in the 13 percent to 15 percent range. Why is growth slowing?
Johnstone: They're stepping up investment in their DSL service. The company had expected to have done an IPO for the South American operation by this time, and because they weren't able to offset losses in that division, that affected earnings somewhat. It's an interesting situation because in my view this company's aggressive deployment of DSL is a strong positive, but the market is clobbering the shares today.
CNNfn: BellSouth is planning to increase its DSL customers by 200 percent next year, with 2001 CAPEX expected to be in the $5.5 billion-$6.0 billion range. Will that be enough?
Johnstone: Yes. They'll re-direct capital expenditures and focus in spending more on the growth areas like DSL. They've been ramping up DSL deployment quite rapidly, so those numbers are achievable.
CNNfn: BellSouth has telecom holdings in 10 Central and South American countries. How is that investment doing?
Johnstone: It's been a good investment for them. In South America, wireless in a tremendous growth area. Only like one out of 10 households have wire line services.
CNNfn: BellSouth also plans to restructure its consumer video entertainment business. Why is that, and could it result in a significant charge to earnings next year?
Johnstone: I'm not surprised if they sell that division. I think BellSouth and Verizon and others have found that a cable overbuild strategy -- trying to upgrade their phone infrastructure to provide video services -- has not been successful. This is a trend -- Verizon and SBC have sold their video assets as well.
CNNfn: Why is the stock down over 6 points today?
Johnstone: The local phone companies like Verizon and SBC trade on earnings, and people are looking at earnings going from $2.52 to $2.40. There will be a contraction in valuation because of that. In my view, investors should take the longer view and understand that the deployment of DSL will help long-term revenues and earnings growth. A good example of that was SBC. If you look back to a year ago, when SBC announced "Project Pronto" to aggressively deploy DSL services, DSL shares were weak. Now SBC has been successful and the stock has done quite well and they're expecting about 13 percent earnings and revenue growth next year. BellSouth shares got hit today, but if it generates strong growth in DSL next year, you'll see nice performance in BLS shares. I like BLS because they have tremendous wireless assets and because the growth in DSL will help revenue growth.
CNNfn: What's your outlook for the sector?
Johnstone: Local phone companies are doing fine because of the growth in wireless and data and internet services. Wireless revenues are growing in the 17 percent-20 percent range, and data services are growing in the 25 percent-30 percent range. Those are the 2 primary growth drivers. DSL is a tremendous growth area and they seem to be aggressively deploying these services.
What are your favorite stocks in the sector?
Cox Communications (COX: Research, Estimates)
Qwest (Q: Research, Estimates)
BellSouth (BLS: Research, Estimates)
-- compiled by CNNfn reporter Carmina Perez 
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BellSouth.com
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