Prepaid Carriers Show Higher Growth Potential - James D. Breen - William Blair And Company, L.L.C.
February 2, 2012 - The Wall Street Transcript has just published Wireless Communications & Telecom Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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James D. Breen, CFA, joined William Blair & Company, L.L.C., in 2010 as a communication services Analyst. Previously, he spent 10 years as an Analyst at Thomas Weisel Partners LLC. He has been recognized several times in recent years by The Wall Street Journal's "Best on the Street" and the Financial Times/StarMine "World's Top Analysts" listing, the former of which recently ranked him the number two stock-picker for 2010 in Internet/computer services. Mr. Breen also worked as a high yield and fixed income Analyst at BancBoston Robertson Stephens and as a Civil Engineer at Modern Continental Construction Companies, Inc. He holds a B.S. in civil engineering from Tufts University and an MBA from the Carroll School of Management at Boston College.
TWST: What is your coverage in the wireless space?
Mr. Breen: It's pretty broad. In the traditional wireless space, I cover AT And T (T), Verizon (VZ), Leap (LEAP), MetroPCS (PCS), Sprint (S), Boingo (WIFI). Internationally, I cover America Movil (AMX) in Latin America and Nextel International (NIHD) in Latin America. The other half of my coverage are the data center and internet infrastructure names, Rackspace (RAX) and Equinix (EQIX). A lot of the growth in the data center is coming from mobile traffic.
TWST: Is 4G and the 4G phone going to be the "next big thing"?
Mr. Breen: I think so. I think that what you found, and it's why the carriers are a little bit in a hard spot, is that historically, from a technological standpoint, the carriers have been able to dictate how technology is used by the consumer because they control the gateway to that technology. With the advent of the iPhone and the Google (GOOG) Android platform, really the handset providers are the ones stirring the pot with consumers and saying, "OK, here's this new device, we're going to give you this; here's what you could do with it if the carriers improve their network quality." It phases a portion of the carrier's full capex into the network and to upgrade speeds at the same time that they are forced to subsidize more expensive smartphones. So from a cash flow perspective, it's a little bit of a squeeze.
TWST: Do you have stronger picks in the international market than in the U.S. market right now?
Mr. Breen: In Latin America, I have an "outperform" on Nextel International, NIHD, which is all business focused. I think they are well positioned to take advantage of this upgrade to data, as a lot of 3G networks get rolled out in Latin America. AMX is one, I have a "market perform" on it now, but I think that they are another company that could be a beneficiary of this trend, maturing markets moving more toward data ARPU, away from voice ARPU.
TWST: Are any of the international carriers looking to enter the U.S. space at this time?
Mr. Breen: I think it's probably unlikely to see a large international carrier coming into the U.S. right now, part of the reason is that the U.S. market is very competitive. The name that would come off the top of your head would be like a Deutsche Telekom which owns T-Mobile, or a company like Vodafone (VOD) which owns 45% of Verizon Wireless, or a Telefonica (TEF), but I think that if you look at their ownership base, they don't have a lot of interest in moving into a market like the U.S. where it seems like we're reaching the point of maturity and potentially increased competition on the price side. The question is, if we look out three or four years, are we going to start to see sort of megaconglomerates? As these markets really mature and they do end up looking a lot more like utilities, it is possible that an America Movil or AT&T could get together and form one large North American carrier. That wouldn't be too dissimilar from a company like Telefonica owning assets in Latin America and in Europe, or Vodafone owning assets all around the world. There is that possibility.
TWST: Is the wireless space a good place for the average investor to look at?
Mr. Breen: I think it's difficult. I think that AT&T and Verizon can be good income stocks for an investor just because of the relative stability. The actual stocks don't move a lot and you have a 6% or 6.5% dividend. But they tend to be more of an income investment. From a growth perspective, there's not a lot within the U.S. that's continuing to grow. I think you're seeing companies like Leap and Metro that do have the higher growth within the U.S. wireless space are also very volatile from a stock perspective. So it's hard when you are looking at stock that is that volatile. Today is a good example of that. Both companies are down 7% or 8% today, and they were up a similar percentage just two days ago. So there tends to be a lot of volatility. Investors that are looking at these names have to have a pretty clear understanding of some of the risks involved and also of the volatility involved with owning them.
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