"Investors have been focusing on the shortcomings at Qwest Communications International (NYSE: Q), and to be sure, it has plenty," observes turnaround specialist George Putnam.
In his The Turnaround Letter, he adds, "But the company also has very valuable assets and strong cash flow. In addition, we believe the stock would command a good premium in a takeover." Here's his bullish review.
"Following its IPO in 1995, Qwest expanded via acquisitions and partnerships, and participated in the telecom bubble of the late 1990's.
"Unlike many of the other high-flying telecoms of that era, however, Qwest realized that in addition to a story you needed customers. In 2000, it went out and acquired US West, which gave Qwest the revenue base to survive the bursting of the telecom bubble
"Although the company survived, the shareholders have had a rocky ride during the current decade. The stock peaked around 60 in 2000, dropped to just above 1 in 2002, rebounded to 10 in 2007 and then declined to its present level.
"Management's challenge is too maximize the value of its assets. One of Qwest's greatest assets, and biggest challenges, is its huge traditional landline telephone business. The landline business is in a slow but steady decline as customers move to wireless or Internet telephony.
"But each landline customer also represents the opportunity to sell new or expanded services, including data, video and wireless. Qwest has partnered with Verizon Wireless to provide cellphone service, and DIRECTV to provide video, and it is building out its own broadband data capability.
"The company is showing good growth in broadband and video customers. Wireless customers have declined recently as Qwest changed partners from Sprint to Verizon, but they should begin to rebound as the new relationship becomes better established.
"Qwest has been successful in expanding the revenues of its business services unit, and as it adds products on the consumer side, it should be able to improve revenues there as well.
"In the meantime, the company is cutting costs to boost the bottom line. Over the past five years, management reduced expenses by $2.5 billion. So far in 2008, Qwest has eliminated 2,300 jobs (6.4% of its workforce), and it just announced plans for another 1,200 job cuts.
"Cash flow remains very strong. After using the cash inflows to cut debt by nearly one-third since 2001, the company has begun returning cash to shareholders – about $1 billion over the first nine months of 2008 – in the form of dividends and share buybacks.
"As the stock price has declined, the dividend yield has risen to a very generous 12%. While dividends are never guaranteed, management appears committed to maintaining the high payout. The company also has plans to buy back another $200 million of its stock.
"We believe that Qwest will reward shareholders by growing revenues and profits on its own. But it is also a very attractive acquisition candidate.
"It would fit well with either of the other two, much larger, remaining former Baby Bells, AT&T or Verizon. Or it would provide a good beach-head for a foreign telecom company that wanted to expand into the U.S. market.
"At about six times this year's expected earnings and four times cash flow (measured by EBITDA), Qwest looks very cheap.
"We would expect earnings and cash flow to increase and multiples to rebound as investors become less skittish – leading to a significantly higher stock price. Alternatively, we believe the stock would command a good premium in a takeover."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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