AT&T, Frontier, Telephone and Data Systems plunge as Citi cuts on lead worries

Anne Czichos

AT&T (NYSE:T), Frontier Communications (NASDAQ:FYBR) and Telephone and Data Systems (NYSE:TDS) fell sharply on Monday, continuing last week's slide as investment firm Citi downgraded the trio on worries related to lead sheathed cables.

Analyst Michael Rollins cut his rating on the trio's stock to neutral/high risk and lowered the per-share price targets to $16, $17 and $8, respectively, pointing out the concerns related to lead sheathed cables are likely to be an overhang "for at least a few months and potentially longer" until the market can get a better idea of the financial risk associated with it.

"[C]opper network deployed with possible lead sheathing could be a significant percentage of the legacy network deployed nationally with varying exposures for each firm," Rollins wrote in an investor note. Rollins added that he is unable to quantify the risks right now and the timing to get more information could take a few months and an ultimate resolution could take "years."

AT&T (T) and Telephone and Data Systems (TDS) shares fell more than 6% each, while Frontier Communications (FYBR) plunged more than 15%.

Verizon (VZ) shares dropped 5.6%, near a 13-year low.

Rollins estimated that both AT&T (T) and Verizon (VZ), which was also implicated in the story from The Wall Street Journal, could have a "significant" percentage of their respective networks impacted by lead sheathing cables. For Verizon, Rollins learned that it could be as much as 20% of its copper network infrastructure.

Both Verizon (VZ) and AT&T (T) said the potential exposure to lead inside their network infrastructure could be a small percentage, according to Rollins.

For AT&T (T), Rollins, said he still expects the company to make progress on cash flow and continue to reduce its debt load over the next two years, before the consideration of any potential liabilities associated with lead sheathed cables.

Regarding Frontier (FYBR), Rollins said the company's "ongoing reliance" on the capital markets to build its networks could make the cost of capital complicated and impact the pace at which it pursues upgrades. He also expects second-quarter fiber net additions to be slower, citing lower move rates and seasonality.

Concerning Telephone and Data Systems (TDS), Rollins said the company's wireline exposure needs to be further evaluated given its investments in fiber and cable assets, which are likely to be an overhang for the stock.

On Friday, J.P. Morgan downgraded AT&T (T) over worries related to the lead sheathed cable issue.

Analysts are largely bullish on AT&T (T). It has a BUY rating from Seeking Alpha authors, while Wall Street analysts rate it a BUY. Conversely, Seeking Alpha's quant system, which consistently beats the market, rates T a HOLD.

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