Long-Distance Runner

They laughed last year when I told them that Verizon was going to win it all in this new telecommunications game. I’m talking about those hotshot managers, the ones who backed WorldCom and Sprint and AT&T and SBC Communications, not to mention Teligent, Winstar, Covad, NorthPoint, and 360networks – all those other alternative carriers that sprang up overnight, like dandelions, in the phone-call field. When I said Verizon would outlast everyone else and end up the favorite telecommunications holding, they snickered and said that I had lost my touch. The idea that faceless, fuddy-duddy Verizon (it used to be the old Bell Atlantic) could do anything right was ridiculous. Verizon means “carrion” in Latin, one of them told me. Actually, it doesn’t mean anything (it just sounds good when James Earl Jones says it in the commercial), but the implication was clear: These guys are just maggot-infested roadkill on the information interstate.

Now, a year later, no one’s laughing. They’re just buying. Verizon has become the way to play the future in telco. It offers the hefty yield of a safe stock, the rapid growth that semiconductors and software once provided, and the asset play that we used to dream about unlocking at AT&T until we found out there was nothing there.

And here’s the sweetest part. The new Verizon looks suspiciously like what we all originally wanted from AT&T before the regulators went nuts and forced a stupid, economically unsound breakup (that at last is being undone by the markets). Verizon is the new AT&T, with better management, better prospects, and a chance for massive appreciation without the attendant risk we have become so used to when we make a technology bet. In fact, the only thing that could prevent this stock from becoming the preferred telco vehicle for the next generation of portfolio managers is if the regulators once again try to stop a good thing: a truly unified telecommunications giant that offers local, long distance, data push, and wireless, both domestic and worldwide.

How did it happen so fast? How did this prosaic utility become the most-sought-after stock in the fastest-growing segment of technology – i.e., telecommunications? Simple: When everyone else was screwing up, Verizon just went about doing its business. When everyone else overexpanded and courted Wall Street with plans for growth that could never be met, Verizon plodded along, going state by state to get permission to offer local and long distance. Oh, yeah, and it sure helped when the biggest guys on the long-distance block – AT&T, WorldCom, and Sprint – all imploded at the same time.

The comparison between AT&T and Verizon is perhaps the most telling. At every juncture, the nondescript bureaucrats at Verizon made the right moves while the flashy flyboys at AT&T chose wrong. Let’s start with cable. A few years ago, Bell Atlantic, before it became Verizon, came very close to buying John Malone’s TCI, until management realized that the cost of upgrading the cable system to make it interactive would bankrupt them. AT&T, on the other hand, took the plunge, paid top dollar for Malone’s low-tech behemoth, and then mortgaged the ranch to upgrade the system. But AT&T ran out of money before the job was done, and now the whole thing’s back on the block. And it will be worth far less than what AT&T originally paid for it.

How about wireless? AT&T went with TDMA, shorthand for what was then state-of-the-art technology for transmitting wireless calls. Verizon, however, went for the far more robust CDMA technology. The result? Verizon can add as many people as it wants to its system without ruining its signal. But AT&T can’t bring on much more capacity, because TDMA simply doesn’t work as well. In plain English, this means that in New York, your cell phone works better with Verizon than with AT&T Wireless. (AT&T is now finally starting to phase TDMA out.)

And long distance? Right now in the states where Verizon is allowed to handle both local and long-distance calls, the once-sleepy competitor is signing up new customers at a pace that’s shocking even Verizon’s own people. New York and Massachusetts markets are rocking, and just two weeks ago, Pennsylvania approved Verizon’s entry there. New Jersey still won’t allow Verizon to sell long distance within its borders, but the betting is that the Garden State will soon cave.

In the meantime, the competition keeps going belly-up. All of those little companies that were bent on eating Verizon alive with low-cost high-tech service – companies like Winstar, 360networks, and Teligent – needed too much money to make their networks work. They ended up tapping the high-yield-bond market, which actually demanded that the coupons be paid (what nerve!), something few of the companies could manage because of a critical lack of cash flow. Their dazed customers are now stumbling back to Verizon as carrier after carrier defaults.

And with the stock market acting better, Verizon is about to break out its fastest-growing unit, its wireless division, in a public offering. While the market has been averse to telco issues, this one seems like a natural to fly simply because, unlike all other wireless plays, Verizon’s has a decent balance sheet.

For the longest time, it looked like the winner out of the AT&T breakup would be SBC Communications, the hard-charging Texas outfit that made it into the Dow Jones Industrial Average list as the telco of the future. But with multi-quarter bungling and horrible integration of its giant acquisitions, SBC’s looking more like a farce of a company, with pissed-off customers and shareholders. If the Dow Jones stock picker could do it over again, I am sure he would have picked Verizon over SBC. It would deserve the accolade. Remember when all those widows and orphans who owned the once-rock-steady AT&T found themselves in a speculative go-go flameout? Now it’s Verizon, one of the babies of AT&T, that is at last giving those widows and orphans another chance.

I hope they take it.

Check out this week’s “10 Questions” on TheStreet.com, spotlighting Faraz Naqvi, director of Dresdner RCM Global Health Care Fund. Available free at www.thestreet.com.

James J. Cramer is co-founder of TheStreet.com. At the time of publication, he is long Verizon. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions that he takes may change at any time jjcletters@thestreet.com.

Long-Distance Runner