Telephone industry is a difficult call


Our vision of future technology never is 20-20.

Science fiction films of the 1930s through the '50s featured futuristic spacecraft and uniforms. But when it came time to communicate, it wasn't unusual to see the captain reach for a rotary telephone.

Later, crew members of the original "Star Trek" television episodes kept talking of saving the Enterprise's computer tapes. As technology has unfolded, they really should've been talking about computer discs.

The telephone industry in the years since the AT&T; breakup has been just as difficult a call, with the story line ever-changing. Technology undoubtedly will have an impact we can't currently fathom.

However, here's how that industry is shaping up for investors:

Long-distance carriers have a lot of their growing pains behind them, and their stocks are on the rise.

Regional carriers are facing difficulties that will have a chilling effect on dividend growth and price appreciation.

"I'm bullish on long-distance, thanks to its accelerating growth, international activity, the improving economy and a more stable pricing environment," said Stephanie Comfort, analyst with Morgan Stanley.

"The regional carriers, on the other hand, must upgrade to compete and must depend upon the regulators for approval."

Competition in the long-distance market continues, but the market-share battle is slowing. AT&T; actually raised prices recently.

Of the big three long-distance carriers, AT&T; holds 60 percent of the market, down from 65 percent in 1990; MCI Communications Corp. holds 18 percent, up from 14.5 percent; and Sprint Corp. holds 9 percent, up from 8.8 percent.

Technology is the next battleground. AT&T;'s dramatic, $12.6 billion plan to acquire McCaw Cellular Communications represents a strong belief in the future of cellular telephones and perhaps even personal phone numbers. The deal still is subject to government and shareholder approval.

AT&T; also owns 50 percent of EO Inc., maker of a pen-based computer with hand-held phone and fax. AT&T; owns a stake in the General Magic alliance, for access to "smart message" technology that seeks recipients at various destinations. It owns NCR Corp., which makes computers in retailing and automated bank-teller networks, and has ties to video-on-demand and on-line entertainment firms.

Meanwhile, MCI and British Telecom have agreed in principle to form a strategic alliance, with the goal of providing a seamless network to carry voice and data transmissions for multinational companies throughout the world.

"Long-distance is one of the few real growth industries around and will continue to benefit from globalization, making AT&T; and MCI Communications 'must-own' stocks," said Jack Grubman, analyst with PaineWebber Inc.

"If you own stock of regional carriers, don't sell, but you won't see most of them raising their dividends every year, [unlike] in the past."

In long-distance, MCI is recommended by Comfort and Grubman; Sprint, which also has taken positions in new technologies and is considered a turnaround, is a Comfort and Grubman pick; and AT&T; is a Grubman selection.

Some are more cautious.

"Looks to me like the past volume gains in long-distance have been exhausted, with, for example, a gain of only 6 percent last year," warned John Money, analyst with Argus Research Corp. Money suggests the sale of MCI and AT&T; for the short term, while he'd hold Sprint. For the longer term, he'd buy MCI but hold Sprint and AT&T.;

Regional carriers are a trickier call, with analysts neutral on most of them as they tackle increased competition and diversification.

"Regional carriers are undergoing an evolution from utility-type equities to growth-type vehicles, which means less dividend growth," said Steven Yannis, analyst with Kidder Peabody. "Over time, unregulated businesses are becoming a larger portion, and those best-positioned for wireless will have the best stories to tell."

Southwestern Bell is a favorite of Yannis, Money and, to a lesser degree, Comfort. It's well-managed and diversified and has a strong cellular operation.

US West, investing $2.5 billion in Time Warner Entertainment and gaining among regionals in interactive video, data and voice services, is recommended by Comfort and Money. Nynex is a Comfort pick because of its low price. Pacific Telesis, spinning off its wireless business next year, is recommended by Yannis.

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