Telephone Stocks Dial for Growth

TRADITIONALLY, "telephone" companies such as American Telephone & Telegraph Company have been viewed as solid defensive stocks during years of economic difficulty. In bad times as well as during prosperity, businesses and individuals have to maintain communications contacts - although the growth in usage tends to fall off as the economy slows.Today, the overall rule still rings true: Telecommunications stocks are considered a generally good long-range hedge against economic uncertainty. Moreover, the global telecommunications industry is poised for steady growth, both within the United States and abroad. The challenge is that yesterday's "telephone company industry" has been replaced by a far more sophisticated "telecommunications industry" involved in such diverse products as cellular phones, space satellites, and voice-mail systems as well as local and long-distance phone services. Special care is required in identifying those companies - and sectors within the industry - showing possible growth, says Rao Chalasani, a market strategist with Kemper Securities Inc. Mr. Chalasani says the global telecommunications industry will be a growth industry in the years ahead. "Society is continually becoming more information-oriented," he notes. Moreover, telecommunications services tend to grow along with economic expansion. Kemper Securities predicts the US economy will grow at a 2 to 2.5 percent rate next year, although Chalasani concedes there is a real risk of another downturn. "We're not quite as optimistic as we were a few months ago." But he says "Washington can be expected to do everything it can to boost growth well before the November [1992] election." Examples of telecommunications firms that look promising over time, according to Chalasani, are California Microwave Inc. and Octel Communications Corporation. California Microwave is a leading supplier of satellite earth stations to the third world. Octel is a leader in voice information systems. Joel Gross and Suzanne Becker track the telecommunications industry for Donaldson, Lufkin & Jenrette Inc. They note that recently released third-quarter earnings reports show that the recession is still adversely affecting the industry. Access line growth, minutes of usage, and message volumes are all at "depressed levels." Yet the analysts predict modest gains in access line growth for a number of telecommunications companies. The improving line growth suggests that industry demand may slowly be rebuild ing around the US. Earnings for many of the telecommunications companies have been far less than rosy of late, a trend that the two Donaldson analysts expect to continue for another quarter or two. But earnings can be expected to improve, assuming the economy improves. Regional Bell companies are viewed as fairly attractive defensive stocks. Baby Bell stock prices do not decline as much in a recessionary climate as the broader market. Some cellular companies also look promising. The two analysts like AT&T, based on the fir m's corporate restructuring and improving long-distance business. Looking beyond the US, the global telecommunications industry "is likely to experience a sustained period of growth," according to a study by Salomon Brothers. Salomon says the total number of telephones in service could double between now and the year 2000 - to about 1 billion phones. Moreover, many third-world nations are moving toward adopting digital technology, as has already occurred in the US and other industrial nations. Among factors propelling the telecommunications industry abroad are the growing demand for phone services, privatization of government-owned phone systems, and government-sponsored modernization programs in the third world. Regions and countries expected to have growing telecommunications industries in the years ahead, experts say, include the US, Eastern Europe, Britain, Mexico, parts of South America, including Chile, and possibly Hong Kong.

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