Telephone Industry Rings Up Growth

REMEMBER when the "telephone system" in the US meant a simple call to someone from a modest little phone unit, probably basic black. And mighty American Telephone & Telegraph Company dominated the industry. Of course, that's gone. Granted, Ma Bell is still an industry giant. But today's telephone industry involves a bewildering array of corporations - from telecommunications companies (the carriers, which are either long-distance or local) to equipment manufacturers. And you haven't seen anything yet. There is a dazzling new array of services and choices ahead, says John Slatter, an analyst with Kemper Securities Group Inc.

In many localities, Mr. Slatter notes, callers can now or will soon be able to order "call forwarding" - with calls relayed on to you from another phone; "Caller ID," with the ability to let you see a digital readout of the phone number of the party on the other end; "automatic-redialing;" "call waiting" (a beep tells you someone is trying to reach you while you're talking); distinctive rings (for mom, dad, and the kids); and coming not far off, video imaging - right out of Dick Tracy, circa 1940.

What all this adds up to, says Slatter, is a telecommunications industry with definite long-range growth potential. That's a contrast with the past, when telephone stocks were considered defensive issues, especially steady during recessions. But what gives the industry long-range momentum, he says, is expansion in long-distance service, growth in cellular products (remote and mobile car phones), and the types of new service options noted above.

Slatter sees long-distance calls growing at 8 to 10 percent a year. Although the seven "Baby Bells," the regional phone companies around the US, can't participate in long-distance calls (that's the turf of AT&T and its competitors, such as US Sprint and MCI), long-distance carriers are required to pay the local Baby Bell an access charge. So, Baby Bells indirectly benefit from long-distance growth.

Moreover, cellular systems are growing "at a phenomenal rate," typically 30 to 40 percent a year.

Slatter likes three Baby Bells - US West, based in Denver, Southwestern Bell, St. Louis, and Ameritech, Chicago.

Ameritech has done especially well, in part because it is in the Upper Midwest, which has managed to escape much of the economic slump, and because it has "not shifted out of basic telephone service and gone into other ventures," as has been the case with several of its competitors.

One additional factor helping the industry in general: last fall the Federal Communications Commission began "incentive regulation," which meant that companies can retain more earnings based on higher productivity.

Not all sectors of the telecommunications industry are expanding at the same healthy pace. Nor all companies. Some stocks, such as AT&T and MCI, are trading well below their 52-week highs.

Since 1984, when AT&T was broken up, the overall industry has outperformed the stock market, notes Michael Elling, an analyst for Oppenheimer & Co. In a study late last year, Mr. Elling found that the regional Baby Bells did best, followed by independent companies, and finally, long-distance carriers. Currently, he says, the long-distance carriers look best, in terms of growth prospects. But it is essential, he says, that the "digital roadblock" be ended; only 7 percent of local service is digital, comp ared to 100 percent of long distance. Digital technology reduces operating costs and allows high-speed data transmission.

Joel Gross and Eric Buck, analysts for Donaldson, Lufkin & Jenrette, see industry sectors veering in somewhat different directions. Mr. Buck maintains that the communications equipment sector warrants an "unfavorable" rating for now, in part because the spending outlook of the Bell operating companies is flat. On the other hand, Mr. Gross, who follows the "carriers," holds that there are selective opportunities, especially among independents and smaller long-distance companies.

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