Our Embarq Call was Right

Highlights include Embarq Corp. (EQ), Sprint Nextel Corp. (S - Analyst Report) and CenturyTel, Inc. (CTL - Analyst Report).

Since the early days of Embarq's (EQ) split from Sprint Nextel (S - Analyst Report), Zacks telecom analyst David Weissman, CFA had been bearish on the company along with a few other regional telecom operators. In February 2007, he provided an underperform rating when the stock was trading above $55 per share. As of today's open, the stock is valued at $37.30 per share.

Embarq, the fourth largest local telephone service provider in the U.S., continues to be challenged with access line losses and erosion of traditional voice revenue, largely resulting in decreasing consolidated sales for full-year 2008.

While the company has received shareholder approval for its consolidation with CenturyTel (CTL - Analyst Report), under an $11.6 billion merger deal (expected to close in 2Q 2009), it is difficult to predict how consolidation will significantly improve overall business fundamentals. Lower revenue forecasts for the first-half of 2009, acceleration of access line loss, and weakening CTL valuation levels support this thesis.

The local phone business in North America, in particular service offered by regional carriers, has significant challenges ahead as consumers and business customers migrate to alternative solutions including VoIP, wireless and cable offerings. Service pricing contention and the need to invest further in broadband infrastructure may strain balance sheet conditions moving forward.