NEW YORK (CNN/Money) – Looks like investors have one more reason to hang up on telecom stocks.
The Federal Communications Commission Thursday voted to not eliminate current rules that force the Baby Bells to lease access on their local lines at a discounted rate. Instead, the FCC left the matter to state regulators.
That's bad news for Verizon (VZ: Research, Estimates), SBC Communications (SBC: Research, Estimates), BellSouth (BLS: Research, Estimates), and Qwest (Q: Research, Estimates), since it increases the chance that they will lose market share in the lucrative local phone business.
And it's rotten for telecom-equipment companies like Lucent (LU: Research, Estimates), Nortel (NT: Research, Estimates), and even Cisco Systems (CSCO: Research, Estimates), since the Bells will have even less incentive to increase their capital spending plans this year.
"There was confusion in the industry over who can do what and this just causes further confusion," said Joe Noel, an analyst who covers telecom equipment stocks for Pacific Growth Equities. "What the FCC did is freeze capital spending because nobody knows what will happen for at least another nine months."
Noel does not own shares of any companies he follows and Pacific Growth Equities does not have investment banking relationships with any of them.
Can't get no relief
Lynda Starr, an analyst with Probe Research, an independent research firm focusing on the telecom sector, says that the Bells probably would not have significantly increased their capital spending plans if the FCC ruled in their favor. So the decision does not change much.
But Timm Bechter, a telecom analyst with Legg Mason, says that the Bells might now cut back on spending, especially since as a group they have relatively high dividend yields to maintain.
SBC Communications currently has a dividend yield of 5.1 percent. Verizon yields 4.4 percent and BellSouth pays a dividend yielding 3.9 percent. Qwest has a yield of 1.4 percent.
Still, Bechter says that the ruling doesn't really change the long-term view for the telecom industry, namely that carriers will eventually begin to spend more on fiber-optic networking equipment in order to increase their digital subscriber line (DSL) penetration.
In fact, the FCC also ruled that the Bells wouldn't have to share access on newly installed fiber-optic cable with other competitors seeking to offer high-speed DSL Internet access. That was seen as a slight positive for the Bells, but probably not enough to spur them to spend more just yet.
One day that will mean more business for networking companies like Alcatel (ALA: Research, Estimates), Advanced Fibre Communications (AFCI: Research, Estimates), Cisco, Nortel, and Juniper Networks (JNPR: Research, Estimates). However, Bechter says Lucent would probably not benefit as much, since it is more dependent on international customers and wireless networking, and not next-generation networks in the United States. Bechter owns shares of Cisco and Juniper and Legg Mason does not do investment banking for any of these companies.
But investors aren't looking at long-term prospects right now. The Amex Networking index was down nearly 2 percent Friday afternoon, after losing 2.3 percent Thursday. Shares of the Baby Bell got crushed Thursday as well. They recovered Friday, with the exception of SBC.
"People disgusted with the telecom sector might become more disgusted and will wait even longer to look at it again," said Bechter.