Big Money on the Line for Phone Companies

With the federal government set to announce the largest telecommunications contract ever awarded within the next ten days, you know we have to find a way to profit from it. Cramer’s test is to find the company to which the contract matters most. We want the company whose stock should really go up if it gets the nod.

Let’s break it down real quick: Most likely, a $20 billion contract isn’t going to make or break AT&T and Verizon. They’re so gigantic they’d barely notice. The biggest gain Cramer sees if either one got the bid would be about 50 cents to 60 cents per share.

And that’s not to say AT&T hasn’t already enjoyed a 10% pop, but it’s doubtful it will see another. And Verizon is spending so much money these days on fiber – which is more important to the Street right now – that the $20 billion wouldn’t register.

Now it’s no doubt that the contract would be a big deal for Sprint-Nextel. But a recent strong quarter already sent the stock from $17 to $19, and Cramer doubts the company is so good that the price will continue to climb.

So that leaves Qwest. Yes, Qwest Communications International – the same company you read about in the papers everyday because former CEO Joseph Nacchio is accused of dumping stock before it became known that his company was in financial trouble. It’s the same Denver-based firm that was hammered by mountains of debt and terrible management. Even still, Cramer thinks it’s going to win this government contract, and that makes it a buy.

And even if it doesn’t get the contract, Qwest still has a number of great safety nets to fall back on. That terrible management team? Gone – and replaced by one that easily rivals the powerhouse leaders at Verizon (Ivan Seidenberg) and AT&T (Ed Whitacre). Qwest also has $400 million of free cash flow. That’s great for buybacks. And low interest rates put the company in a position to reduce its debt through the virtuous cycle of refinancing.

Then there’s the growing broadband penetration and a balance sheet that’s getting fixed just like Level 3 Communications, Cramer’s speculative stock of the year. Qwest has the good fortune to be in a fast-growing part of the country, and, even better, the company is willing to buy or be acquired. If Qwest gets the contract and the stock still doesn’t go up big, Cramer thinks it’s a natural for acquisition.

Bottom Line: Qwest is back from the dead. It’s making money. It won’t have to pay taxes for years because of all of the losses from the Nacchio era. It’s growing again after years of retrenchment. And if Cramer were you, he’d buy it hand over fist, without hesitation.

Questions? Comments?