U.S. telecom stocks fell sharply late last week in response to the Wall Street Journal investigation about U.S. phone companies leaving behind a network of cables covered in toxic lead.
Shares in AT&T Inc (NYSE:T) hit a fresh 29-year low on Friday following the WSJ report. The stock closed 7.1% lower last week while Verizon Communications Inc (NYSE:VZ) lost 5.3% to test 12-year lows.
AT&T stock selloff was accelerated on Friday after JPMorgan analysts downgraded to Neutral.
“Potential copper lead sheathing liability is unquantifiable at this time, but will be a substantial long-term overhang on AT&T and the industry,” they said.
The in-depth WSJ investigation showed that phone companies have left behind more than 2,000 old lead-encased phone cables. Analysts now worry that the investment needed to clean up this mess is measured in the tens of billions of dollars.
As a result, Citi analysts downgraded AT&T stock to Neutral, with a “High Risk” designation. Shares in Frontier Communications (NASDAQ:FYBR) and Telephone & Data Systems (NYSE:TDS) are also lowered to Neutral/High Risk.
“After the past week of discussions and research, we have concluded the industry’s historical use of lead sheathed cabling is likely to remain an overhang for the stocks and valuation for at least a few months and potentially longer until the market can better measure the financial risk (if anything material) for each firm,” analysts said in a client note.
Similarly, Goldman Sachs analysts say the telecom stocks are now facing a new “fundamental” risk related to lead-sheathed telecom cables.
The stock market reaction is understandable given that the market likely wasn’t aware of the issues, say analysts.
“The primary potential fundamental risk that this issue raises, in our view, is that it may take the major wireline telcos longer, and cost them more, to decommission legacy networks based on copper cables that may have lead sheathing. Further, it may be necessary to divert capital from their fiber upgrades towards legacy network decommissioning, which could delay the timeline for completing these projects,” analysts wrote in a note.