Description

Bell Atlantic is a regional Bell operating company that provides wire-line data and voice, wireless voice, directory, and other services in the Northeast and Mid-Atlantic region. We are recommending purchase of Bell Atlantic due to relatively low valuation compared to the market, it is trading at a significant discount to the sum of the parts, and growth rates are accelerating. Bell Atlantic is trading at 19 times fiscal 2000 Estimate of $3.35 and 17 times fiscal 2001 estimate of $3.69 on a stand-alone basis. Bell Atlantic is trading only a slight premium to its growth rate, but at a significant discount to the market. With the GTE merger, revenue growth should accelerate but the quality of the revenues should improve. Revenues are expected to increase to a range of $85 to $90 billion in 2003, up from an estimated $35 billion in 2000 and $32 billion in 1998. More important, the core business will be 51% of revenues in 2003, down from 74% in 2000 and 82% of revenue in 1998 as the faster growing business such as international, data, and domestic wireless contributed to 49% of 2003 revenues. Further, revenue growth, EBITDA growth and EPS growth all are projected to accelerate in 2001 and beyond: long-term revenue growth will be 8% to 10%, EBITDA growth will be 10% to 12% and earnings growth will be 15% plus, up from current revenue growth of 5%, EBITDA growth of 8%, and earnings per share growth in the 10% to 12% range. In addition, valuing the telecom business at 8 times EBITDA, the wireless company at 20 times EBITDA, the data company at $8 to $10 a share, an the international/ other business at $20 a share, produces an equity value of $110 to $125 a share, including synergies of $10 a share but net of debt of $15 a share.

The recent wireless joint venture will result in Bell Atlantic being the largest wireless operator in the U.S. The company should able to increase its market share due to its high capacity/quality network, broad coverage and competitive single-rate prices. In addition, other growth opportunities include long-distance (it is the only operator to receive approval), data (with GTE), and broadband DSL. The company is quite committed to shareholder value given its willingness to spin off part of its wireless as well as data backbone business

Catalyst

The major catalyst is the upcoming GTE merger approval, which is the last remaining cloud over the company.