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COPYRIGHT 2002 Adams Business Media
If you live in a major metropolitan area, you probably think middle America is like another country. And in a certain way it is. The rural parts of the country have not adopted telecom services at the same rate as urban areas. For example, second lines, caller ID, DSL and wireless are all at penetration levels that urban centers had achieved several years ago.
Which is why RLECs -- Rural Local Exchange Carriers -- are one of the best plays in the telecom industry right now.
"We view this group as rocks of stability in a volatile industry," says Glenn Waldorf of UBS Warburg. "These companies are former or even current monopolies, have government subsidies. Their cash flow margin exceeds those of the bells, and they're a noncyclical sector."
Alltel, for example. which is the largest RLEC, has 60% cashflow margins, compared with about 41% for giant SBC Communications. And RLECs have about 80% of their lines in residential service, compared with 63% for other carriers, making them more immune to a weak economy, since people don't turn off their phone if they get laid off.
Waldorf sees more near-term growth opportunities for this sector than for large incumbent carriers. "[My group] doesn't get the same benefit from an economic recovery, but I have growth opportunities not related to whether or not there's an economic recovery." RLECs offer wireless services, and if the U.S. grows from 40% penetration to European and Asian levels of 70%, RLECs will greatly benefit.
These carries also have not aggressively pushed services such as caller ID, call waiting and DSL, leaving tremendous room for growth.
Rural operators also face few competitive threats. In fact, Bell incumbents are even pulling out of the rural markets and RLECs are growing just by buying their properties....
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