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Some Investors Hanging Up on AT&T

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate merits of individual stocks.


AT&T (T)

Jim: Buy

Mike: Don't buy


Mike: We're looking only at AT&T today, Jim. We've reviewed it before, but now it's very much in the news again and in the hearts and minds of investors everywhere.

Jim: And what a perfect stock for Halloween, Mike, because this one is a nightmare.

Mike: First, I want to take credit for one of the world's greatest "to be sures," which as you know is a term of art in our business. When you write a story that takes a stand but want to hedge your bet by tipping your hat to the other side, you throw in a line that starts "To be sure." Say you're writing: "The Israelis and the Palestinians are on the verge of peace." You then add, "To be sure, they may very soon be at war again." Then you can always claim you got it right.

Jim: It's basically a big caveat.

Mike: When we last talked about AT&T in August 1999, we were both optimistic about AT&T's plan to build an integrated telecommunications and cable-TV empire. But I ended our chat by saying, "this is great but . . . it better work." And guess what? It hasn't worked.

Jim: We both raised concerns about whether AT&T and its chairman, C. Michael Armstrong, could pull this off. But truth be told, we don't have much to take credit for. We both recommended the stock, and we were dead wrong.

Mike: Yes, we were optimistic when the stock was $51, and here we are today with AT&T trading in the low $20s. However, we weren't the only ones snookered by AT&T's visions of grandeur, cold comfort though that may be.

Jim: Maybe we should have listened more to our own caveats. We both said there were lots of risks in Armstrong's plan, which was to move AT&T away from its traditional but slowing long-distance telephone service and toward faster-growing cable, Internet and broadband services.

Well, AT&T simply hasn't executed this strategy well. Its earnings have gone sluggish. Investors have lost faith, and the stock got hammered, losing more than half its value this year.

Mike: And now AT&T has a new plan--to break itself up, as announced last week.

Jim: In fact, this is the third AT&T breakup since old Ma Bell was busted up in 1984. I don't know, Mike, but now that I've seen AT&T break up three times in my career, maybe I've been doing this too long.

Mike: No comment. But let's put our finger on what's wrong at AT&T. Think of this gigantic company in terms of a fellow on a hand car on railroad tracks, who's doing his best to pump up and down as fast as he can, because coming up behind him is a diesel engine at full steam. The diesel, in this case, is the deterioration of the long-distance business. The question is, will the guy on the hand car make it to the siding before he's turned into dog food?

Jim: Your chap being Mr. Armstrong.

Mike: Yes, he was desperately trying to get AT&T to the siding by combining AT&T's long-distance, cable, wireless and business-services units into one giant, profitable freight train.

Jim: Right. Over the last three years Mr. Armstrong spent more than $100 billion acquiring cable-TV companies to make AT&T, as you said, a one-stop shopping center for delivering everything from phone calls to cable programs.

Mike: The trick was to get all this clicking before, as I said, the diesel train hit him in the rear end. The long-distance business is going away. You can now call anywhere in the country on land lines for 5 cents a minute. Meanwhile, people are moving their long-distance business from land lines to wireless in part because wireless long-distance is often free.

And guess what? One of the pioneers of that was AT&T, which offered its wireless customers free long-distance.

Jim: So now AT&T has this plan: AT&T itself will keep the consumer long-distance and business-services groups, but will create a "tracking" stock for long-distance. Also, it will take the AT&T Wireless unit (AWE), which already is a tracking stock, and spin it off into a separate entity.

Finally, it will do the same with its cable/broadband group, that is, create a tracking stock and then spin it off entirely.

Mike: Nice summary. But this breakup isn't as clean as you might think.

Jim: Meaning?

Mike: They won't really be independent of each other. First, they will be bound together by the AT&T brand name. Also, to the extent that these entities want to integrate services, they will be bound by contracts requiring them to buy these services from each other. So they'll be about as independent of each other as the Duke and Duchess of Windsor.

Jim: So what do we think of the stock now?

Mike: Well, let's start with this note: One Wall Street analyst did an almost unheard of thing the day AT&T announced its plan . . .

Jim: Spoke in plain English?

Mike: Actually, yes. She downgraded AT&T to a "sell." When was the last time you heard that happening to a big company?

Jim: And it's even more rare when it involves a stock in the Dow Jones industrial average.

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