Analyst Sees Trouble for Emerging Telecom Cos.

Oppenheimer analyst Timothy Horan this morning turned cautious on the “emerging telecom sector," cutting his ratings on both Level 3 and Cogent Communications to "underperform" from "perform," while chopping TW Telecom to "perform" from "outperform," according to Barron's writer Eric Savitz.

Horan says slowing demand and decreases in pricing power at Cogent and Paetec Holding are evident. Horan says that while the sector has already been under pressure, the companies are heading for a “difficult six to nine month period.” Slowing or sluggish economic growth tends to lead to slackened demand for communication services, an increase in churn, pricing pressure, slower volume growth and limited access to capital as well.

Horan adds that he thinks estimates are too high for all three companies he downgraded today. “These business models have high operating leverage and a slight slowdown in revenues will have a very negative impact on EBITDA,” he writes. “We expect some of the smaller, private CLECs to go bankrupt, which could pressure valuations in the sector.”

Of course, some of us would say we can't recall a year in the past eight when the "emerging" telecom sector was not "under pressure." Pressure is just a way of life in the competitive segment of the business. Indeed, in every segment of the business.