Wireless Slowing Growth

Wireless edges to investment no-mans-land
By Sinead Carew

NEW YORK, Dec 30 (Reuters) - Wireless has been the star of U.S. telecommunications in recent years but concern about slowing growth is making some investors think twice about laying their bets on cellphone service providers.

U.S. mobile operators have roughly doubled subscriber numbers since 2000, but annual growth is expected to fall to as low as 8 percent next year from estimates of roughly 12 percent growth in 2005, according to Bear Stearns analyst Phil Cusick.

"The industry is definitely decelerating." said Cusick, who believes 2006 will mark the first year that annual subscriber growth slows down since 2002.

Cusick expects U.S. mobile service revenue to grow by about 8 percent in 2006, in line with the average revenue growth rate estimate for companies that make up the Standard & Poor's 500 Index <.SPX>, according to Reuters Estimates.

Such comparisons, and the fact that about 70 percent of the U.S. population already has cellphones, are raising eyebrows among growth investors who favor placing their bets on sectors and companies that grow faster than the general market.

But value investors, who like slower growth cash-rich sectors, are not yet interested in the sector due to low dividend yields and high valuations.

"I think it's transitioning from being a growth industry to being a value industry," said Michael Santelli, portfolio manager of a mid cap value fund for Allegiant Group.

Sprint Nextel Corp. <S.N> and Alltel Corp. <AT.N> are regarded as the key U.S. wireless investment choices as their revenue depends more heavily on wireless than their peers and they are increasing exposure by shedding wired phone units.

They are expected to continue to grow subscriber numbers, but as expansion slows, growth investors may shy from Sprint or Alltel before value investors step in, Santelli said.

"They're probably still in a lot of growth funds but you might say they're in no-man's land," he added.

Another manager of a value fund said that a disappointing investment in Vodafone Group Plc <VOD.L>, the world's biggest mobile provider, is just one factor that makes him cautious about more wireless investments.

"It looked like it had became pretty good value but then it changed because of pricing (competition) and a big acquisition," said Richard Earnest who manages the HighMark Value Momentum Fund, with almost $500 million holdings.

Earnest, who bought Vodafone when its U.S. shares were about $24, had a price target of $40. It traded on Friday at $21.43.

Sprint Nextel shares trade at almost 16 times Wall St. targets for 2006 earnings per share, according to Reuters Estimates. Alltel trades at about 17 times 2006 targets.

But Earnest said that Sprint's trading multiple, which is in line with the S&P 500 Index, is too high for him because of uncertainty about future growth.

"Stepping up to pay a market multiple is hard to justify because we don't know if we can call this a superior company," he said.

Earnest and others also question if emerging high-speed data services such as mobile Web surfing and video and music downloads will boost growth as much as investors had expected. Operators around the world and in the United States are spending billions of dollars developing such services.

David Dreman, chairman of Dreman Value Management, which manages about $14.5 billion of investments, said he is worried that heavy wireless competition will squeeze margins as the number of potential new customers dwindles.

"To us it wouldn't be one of the first value investments we'd want to buy," said Dreman, who favors tobacco and oil industries over wireless. Dreman said Alltel's dividend yield is not big enough to make the stock attractive.

But some analysts and investors say it would be premature to dismiss wireless stocks just yet.

Bear Stearns' Cusick believes that while Sprint Nextel's shares may not jump much in the next six months, it may attract more buyers after it spins off its local phone unit next year.

He expects Sprint Nextel to declare dividends and share buyback programs after the spin off in order to become more attractive to value investors.

Consolidation may also still be a boon to wireless investors even though the industry has already shrunk from six U.S. national players to four, through large takeovers.

Earnest believes mergers may still boost companies such as Alltel, which is seen as a potential acquisition target for Verizon Communications <VZ.N> or Sprint. But he believes some of the premium is already factored into Alltel's share price.

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