Find Refuge in Telephone Stocks

Thanks to positive analyst comments, Qwest shares rose even as the Dow fell.

In times of turmoil, when triple-digit drops in the Dow industrials seem to be the norm, investors can find refuge in telephone stocks, particularly sturdy Baby Bells. Consider the case of Qwest Communications International. On August 14, a day in which the Dow stumbled 1.6%, shares of Qwest (symbol Q) managed a 0.6% gain, closing at $8.55.

To be fair, Qwest shares benefited from positive analyst comments about the company's new leadership. On August 13, the Denver-based telecommunications company announced that it had chosen Edward Mueller to replace retiring Chairman and Chief Executive Officer Dick Notebaert. During a conference call, Mueller said he had no plans to shake up Qwest's strategy or its management ranks. "I don't come in with a mandate to do something different," says Mueller. "Something has to be going right to have the performance they have had. I probably would not have taken the job if I had a lot of worries."

Qwest, which originally focused on long distance, took on its current shape when it acquired US West, one of the seven original Baby Bells, in 2000. Today the company operates a nationwide fiber-optics network and provides local phone service in 14 states, mostly in the West.

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The company has been struggling to expand revenues in the face of declining sales of traditional phone services and growing competition from cable companies. Higher sales of such services as cable television have helped Qwest offset the decline in revenues caused by droves of customers abandoning their land lines for wireless phone service. After four straight years of losses, Qwest moved into the black in 2006. Profits have continued to grow as the company has focused on controlling costs and limiting capital spending.

Thomas Seitz, an analyst at Lehman Brothers, says Mueller's appointment "removes the overhang associated with the risk that new leadership could have meaningfully changed Qwest's strategic direction and significantly ratcheted up capital spending." Seitz on August 14 upgraded the stock to "overweight" from "equal weight," with an $11 target price -- implying potential upside of 29% from the stock's close. Seitz says the company could initiate a dividend or announce a share buyback later this year. The stock trades at 15 times analysts' estimated 2007 earnings of 57 cents a share, according to Thomson Financial.

Mueller has quiet a résumé, which includes 34 years of experience in the telecommunications industry, including senior executive positions at SBC (now AT&T) and Ameritech and Pacific Bell (both of which were acquired by SBC). Most recently, he was chief executive of the Williams-Sonoma retail chain. Mueller's predecessor, Notebaert, took over as chief executive 2002 after Joseph Nacchio was forced out of the position amid an accounting scandal. In April, Nacchio was convicted on 19 of 42 counts of securities fraud and insider trading for lying to investors.

Although Qwest escaped the day's carnage, the other two remaining Baby Bells weren't so fortunate. Shares of New York City-based Verizon (VZ), which controls local service in the mid-Atlantic states and New England, fell 1.7%, to $40.96. AT&T (T), which owns all of the local Bell companies that don't belong to US West and Verizon, as well as its former parent, dropped 2.1%, to $38.26.

Staff Writer, Kiplinger's Personal Finance