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Analyst: Embarq Is Cheap

As far as North American carrier stocks are concerned, Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T) have been getting all the attention lately. Verizon's stock has surged as of late and is now trading at its 52 week high. And over the past year, no carrier has performed better than AT&T's 31 percent growth.

But if you're bottom fishing, you might be looking for something that's sunk, rather than flown. So which carrier falls into that category?

It might be Embarq Corp. (NYSE: EQ).

Embarq's shares have taken a big hit as of late. The stock has fallen about 8 percent in the past week alone and is 15 percent off of its 52 week high among concerns about the struggling housing market.

One analyst, Gaurav Jaitly of UBS AG , thinks it may be an opportunity.

Jaitly says the company may be unfairly tarred by the plummeting housing market. "There were concerns about Embarq's exposure to housing markets in Las Vegas and North Carolina," he says. "People felt that it might have an impact on its numbers."

But whatever the reason for the drop off in Embarq shares, Jaitly says the sell off has resulted in an interesting value investment opportunity.

In a note to clients this morning, Jaitly wrote that in lieu of the sell off, Embarq's shares are now trading at a multiple of 5.7 times estimated 2008 EBITDA -- the cheapest multiple of any major North American carrier.

By comparison, Verizon and AT&T are trading at 6.1x EBITDA and Qwest Communications International Inc. (NYSE: Q) is trading at 6.3x. On top of that, Embarq's 11 percent cash flow yield is also the highest amongst the Bells.

In other words, Embarq is the cheapest carrier stock in North America and is generating the most cash relative to its market cap. "As a value play, it's the best opportunity," says Jaitly.

Aside from being cheap, analysts see lots of potential for growth in the future. "They don't have a lot of DSL penetration," says Andrew Schmitt of Nyquist Capital . "They're sort of in the same position as the RBOCs were a few years ago. So starting with DSL, there is a lot of room for growth. I can see why it is attractive."

In addition to growth opportunity, Embarq is expected to increase its dividend payouts to shareholders over the next 12 months. Its current payout rate of 40 percent of free cash flow is the lowest among all carriers according to Jaitly.

— Raymond McConville, Reporter, Light Reading

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