U.S. stock markets, like most markets around the world, last week experienced a roller-coaster ride that left many companies with no choice but to hold on and hope for the best.
Wireless stocks were not immune to the sudden drop Monday brought on by the mix of economic and political upheaval overseas that fed investors’ fears the several-year-long bull market the United States has enjoyed may not last much longer.
The Dow Jones Industrial Average Monday fell 512.61 points, or 6.36 percent, in the second-largest single-day point drop in history. The stock market rebounded Tuesday, regaining more than half of its losses to close up 288.36 points.
The Dow slid again on Wednesday and Thursday, closing down 45.6 points and 100.15 points respectively.
Analysts said a slow decline that began in July and culminated in last week’s plunge virtually wiped out any stock growth that has occurred since the beginning of this year.
Nearly every stock on RCR’s index fell Monday. Lucent Technologies Inc. was one of the hardest hit when its stock fell $10.12 to $70.88. Lucent’s stock was up to $78 on Tuesday but was trading lower in the $75 range midday Friday.
AT&T Corp. saw its stock fall $5.68 Monday to $50.13 and was trading in the $52 range Friday. Nextel Communications Inc. also took a hit, declining $4 to $18.06. Nextel was trading in the $20 range Friday.
Of the widely held telecommunications stocks, BellSouth Corp. was the only company that gained Monday, with a small increase of 25 cents.
Overall, only five companies on RCR’s index posted gains for the week, while 80 posted declines and two were unchanged. Forty companies on the index fell to new 52-week lows during the week, while only one achieved a new high.
Despite the large drop, analysts say there has been no immediate impact on wireless carriers and vendors. Continued volatility in the market, however, could cause significant short- and medium-term problems, particularly for companies looking to raise capital.
“It could have a very big impact on all emerging growth companies, particularly wireless,” said Mark Ein, a principal with The Carlyle Group, a Washington, D.C.-based private equity firm. “Many of these companies have business plans that are completely based upon raising capital.
“Now the high-yield market is not going to be available, and the IPO market is not going to be available,” continued Ein. “Those companies that already have capital have a gigantic advantage.”
“If you’re a company and you need cash, it’s going to be difficult to raise it in the capital markets right now,” said Timothy O’Neil, wireless services analyst with SoundView Financial Group, Stamford, Conn. When the market bounces back, investors will scrutinize the deals more carefully, he added.
Tim Caffrey, director of corporate ratings at Standard & Poor’s, said, “If this leads to a slowdown in the economy, it will be more difficult for start-up companies [to raise capital through bond issues]. From a business point of view, the economy is still strong, and there is still demand for telecom services.
“If it stays strong, the prospects should be good, although there might be some short-term liquidity problems for highly leveraged companies,” continued Caffrey.
Disappearing public capital could accelerate companies looking into private capital by way of strategic investors more quickly than they had planned, said Jeff Hines, a wireless analyst at Bankers Trust.
The stock-market volatility also could affect the valuation of companies, said Ein. Many companies, he said have changed from a discounted cash flow valuation model to a current cash flow or earnings based-valuation. Those that still use the discounted cash flow valuation are sensitive to assumed multiples and are affected by drops in the stock market, he said.
While analysts say there may be reasons for concern, there is no need to panic.
“The quality names in the group will still be able to raise debt,” said Hines of Bankers Trust. “The high-yield market will be back later this year, although maybe not at the same rates. The cost of capital is definitely headed up.”
“If you look at the major (stock market) swings in the past, such as the one in ’87, how did those affect the growth rate for wireless? They didn’t,” said SoundView’s O’Neil. “The industry grew through international and domestic pressures.”
The reason analysts say wireless could grow increasingly immune to economic pressures is that wireless is becoming more of a necessity, especially in emerging markets where wireless is often the only choice for telephone service.
Both AirTouch Communications Inc., which has a significant presence in Europe, and BellSouth Corp., which holds interests in Latin America, said their operations have seen no immediate impact from unstable world markets. In fact, AirTouch recently announced record subscriber additions in Italy and Germany, and BellSouth said demand for wireless service in Latin America is high.
Kevin Doyle, a spokesman for BellSouth, said although the Brazilian stock market has been down, the company still is adding about 30,000 new customers to its service each week.
“We are very well aware of what is out there and what could happen in the future,” said Doyle. “It’s possible we could see some impact down the road, but to date, things appear to be going very well.
“We spent about 10 years working on proposals to get into the Brazilian market,” he said. “We went in with our eyes wide open, convinced the long-term fundamentals were in place. There may be blips on the radar screen in the short-term, but the long-term potential is still there.”
Instability overseas “will have no effect in the United States,” said Lonnie Strickland, professor of strategic management at the University of Alabama’s Culverhouse College of Commerce and Business Administration. “The reason is because nothing is fundamentally broken in the U.S. economy. I would label this as just a hiccup.”
Many companies, including Boeing Corp., took advantage of the stock-market drop to announce buy-back plans. Few if any buy-back announcements came from wireless companies, though.
“Buy backs are a great idea, but most wireless companies don’t have the capital to buy back their stock right now,” said Christopher Larsen, senior wireless analyst with Prudential Securities in New York. “Either you build out a new city or you buy stock, and your business plan says you build out.”
The short-term strategy for carriers with regard to the volatility should be simply to ride it out, said Simon Reeves, senior wireless analyst at Decision Resources, Waltham, Mass. “If the fundamentals were good three weeks ago, they’re still good now.
“Even if the United States continues to have volatility-whether the market goes up or goes down or stays where it is-it’s not necessarily a bad thing,” he said. “There has been a sort of irrational exuberance over the last couple of years, and this brings some reality into the market. It helps companies make more realistic business plans in the medium-term.”
