Better Days on the Horizon
Morgan Stanley says that its increased confidence is down to its expectation that by the middle of next year, carriers will have more cash available to reinvest in their businesses or pay out in dividends. This is measured by a metric called free cash flow (FCF), which looks at how much cash is freely available to a company after the payment of interest and tax. "We have looked at the various components of free cash flow and our conviction has increased that the wireless stocks can outperform the S&P 500 as companies achieve FCF positive in 2003," says the note. "We believe that the wireless stocks can outperform the market over the next year as investors gain confidence that capex is coming down, free cash flow is increasing, returns are improving, and the appropriate amount of risk is factored in." Morgan Stanley expects a reduction in capital expenditure to be the major driver of the availability of FCF. The firm is expecting capital expenditures of $25.7 billion in 2002, declining to $22.1 billion in 2003 and $18.9 billion in 2004.
"The primary reasons for declining capex include lower incremental demand, the near completion of network expansion and upgrades, and lower equipment costs," the note says.
The firm is counting on operating margins improving and an average growth in net income for the industry of 28.9 percent between 2003 and 2006. The firm is also banking on some consolidation in the industry and the continued cannibalization of wire-line revenues by wireless.
Indeed, Morgan Stanley is hoping for consolidation in the industry, as it says that competition among the six national carriers is "brutal." All of which could see a decline in average revenue per user (ARPU) and an increase in customer movements between networks ("churn"), against a background of steady but slowing growth -- 7.2 percent annually between 2002 and 2005, compared to the average rate of 24.5 percent growth between 1998 and 2001.
— Dan Jones, Senior Editor, Unstrung www.unstrung.com