Telecom stocks: Lead sheath issue could put T Stock, VZ Stock in Doghouse

The sell-off in telecommunications stocks spurred by reports of lead-sheathed cables being installed in telephone networks will likely continue to put pressure on shares of AT&T (T) and Verizon Communications (VZ), say Wall Street analysts. Stock T, stock VZ as well as Lumen Technologies (LUMN) and Border (FYBR) has already lost a combined market value of $18 billion last week.

Most lead-sheathed cables were installed in telephone networks before the 1960s. Making areas safer could cost tens of billions of dollars, analysts say.

“We could see what amounts to a general strike by telecom buyers for some time,” SVB MoffettNathanson analyst Craig Moffett said in a note to clients on Monday. Telecom stocks could be in the niche for a while, even though T and VZ stocks offer attractive dividends, Moffett said.

“Investors are likely to shoot first and ask questions later,” he added. “After all, none of these stocks have outsized growth histories.”

Trading today, T shares fell 6.1% to 13.62. VZ stock fell 5.7% to near 32. LUMN stock fell 5.1% to 1.75. FYBR stock fell 15.7% to nearly 12.

Last week, the Wall Street Journal reported that telecommunications companies had installed potentially dangerous lead-covered cables above poles, in the ground and under water. They will likely have to take steps to make the areas environmentally safe, the Journal said.

The lead sheath problem could last for decades

“The main potential fundamental risk this issue raises, in our view, is that it may take major wireline carriers longer, and cost them more, to decommission legacy copper-based networks that may have a lead sheath,” said Goldman Sachs analyst Brett. Feldman said in his note to clients.

He added: “We do not believe that investors can reasonably estimate at this time whether or to what extent operators will incur additional costs of decommissioning the legacy network based on the known costs of their legacy network upgrade projects. the fiber.”

JP Morgan downgraded AT&T to a neutral rating on Friday amid concerns. Meanwhile, Citigroup also downgraded AT&T to neutral on Monday due to the lead sheath issue.

At TD Cowen, analyst Gregory Williams said in his note to clients: “We see a considerable surplus for the foreseeable future.”

Williams went on to say that telecommunications stocks would be better off if pro-business Republicans were elected in the 2024 election.

“The range of results could range from near zero liability to billions of dollars in damages,” he said. “We highly expect a long and drawn-out process, (with) self-auditing. Plus, lots of political wrangling with potential class action lawsuits and (Attorney General) lawsuits. On the upside, the level of contamination could be overestimated. Or, the number of cables limited to very few.”

Meanwhile, at Raymond James, analyst Frank Louthan said uncertainty about telecom stocks will persist.

“We can’t begin to know how long this will take to resolve, but it could be measured in decades, with other (Environmental Protection Agency) actions like the lead and copper rule as a potential guide,” he said in a note.

Telecom stocks are not growth stories

Louthan went on to say, “Given that this complied with existing environmental regulations and the risk of increased contamination is low, it is reasonable that the cost be spread over more than 10 years, minimizing risk to carriers.”

VZ stock fell 13% in 2023. Additionally, T stock plunged 21%. Moffett of MoffettNathanson said these two giants may see the most exposure to the dollar but could absorb the shock better.

“AT&T and Verizon probably have the greatest potential dollar exposure, given the size of their wireline footprints. But wireline also represents a proportionately smaller share of their business than Lumen and Frontier,” Moffett said. . “Frontier, due to the fact that it is primarily an accumulation of the incumbent telco assets, may have the largest proportional exposure. Stock reactions over the past week are generally in line with these remarks.”

“It’s hard to imagine the arguments that will now persuade incremental investors to intervene,” said the analyst of telecom stocks. “Overview, AT&T and Verizon were already facing challenges related to capital structure, cash flow generation, unit and revenue growth. Add the track to the list of reasons not to be excited about their stories.”

Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.

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