A buy-side and a sell-side analyst say investment-grade telecom and cable names are trading too far apart on a spread basis, given their overall similarities. Both analysts say the sectors have high fixed costs and high leverage. In addition, they say both industries are claiming growth that is difficult to discern due to M&A activity, and both face questions as to what extent consumers are really interested in their products.
The buy-side analyst says volatility is so high in the telecom sector that it is difficult to price risk appropriately. She says either spreads are too wide for telecom bonds, too tight for cable, or both. "I'm inclined to think it's a little bit of both," she says. She recommends a market weight position in telecom and market weight to underweight in cable, but declines to say where her firm is positioned.
There is greater value in Qwest Communications or Sprint than Cox Communications, says Dave Novosel, head of corporate bond research at Banc One Capital Markets in Chicago. While he believes that at 247 basis points over Treasuries spreads on the Cox 6.75% notes of '11 (Baa2/BBB) are "wide enough to be attractive," he sees the Qwest 7.25% notes of '11 eventually trading as tight as 400 basis points over Treasuries. They were bid at 580 over the curve last Monday. As for Sprint, he believes the 8.375% notes of '12 (Baa2/BBB+) will move inside 300 basis points over Treasuries. They were 380 out last Monday. Regarding Comcast, he is a "better seller than a buyer," of the 6.75% notes of '11 (Baa2/BBB), which were trading at 212 over the curve last Monday.
Novosel says that while several people in the market see Qwest as a potential bankruptcy, he is encouraged by the company's moves to cut back capex and sell assets to escape potential problems with their bank covenants. As for Sprint, he says, "Wireless growth is slowing, but 16-17% top line growth and 20% EBITDA is still an attractive business model."