Shares in telecom giants AT&T Inc (NYSE:T), Verizon Communication Inc (NYSE:VZ), Telephone and Data Systems, Inc (NYSE:TDS), and Frontier Communication Parent, Inc (NASDAQ:FYBR) dropped dramatically Monday, shedding 7% to 15%. The Wall Street Journal's investigation revealing the neglect of a network of harmful lead-coated cables prompted the market backlash.

In a note released Monday, Citigroup analyst Michael Rollins examined the situation regarding the cable network deployed by these telecom companies nationwide.

According to Rollins, a considerable percentage of these cables may have lead sheathing, with varied amounts of exposure for each company. As a result, the analyst believes that this issue will continue to have an impact on stocks and their valuation for a few months, if not longer, until the market has a better understanding of the financial risk involved.

Rollins stated that gathering more information regarding the matter could take several months, and that a final resolution could take years. According to Citigroup's current scenario estimate, most wireline telecommunications companies will experience a firm valuation discount ranging from 0.2x to 1.0x of EBITDA.

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Chart: AT&T Tumbles to February 1993 Levels, Verizon to November 2010

Citigroup Actions

In response to recent developments, Citigroup has downgraded its ratings on AT&T, Telephone and Data Systems, and Frontier Communication to Neutral/High Risk. While the price targets for these stocks have been reduced to $16, $8, and $17, respectively.

ETF That Holds Telcos

The U.S.-listed exchange-traded funds with the highest exposure to AT&T are the iShares MSCI USA Value Factor ETF (NYSE:VLUE) with a 5.1% weight and the iShares U.S. Telecommunications ETF (NYSE:IYZ) with a 4.2% weight.

The iShares Trust – iShares U.S. Telecommunications ETF also has a large stake in Verizon (12.4%), which is also represented by an 8.3% weight in the First Trust Morningstar Dividend Leaders Index Fund (NYSE:FDL).

Frontier Communication is a 3% holding in the SPDR S&P Telecom ETF (NYSE:XTL).

Telcos' Response

In response to the investigation, AT&T and USTelecom, an industry group, developed websites debunking concerns about the environmental and public health implications of lead cables.

A spokesperson for USTelecom emphasized that there is no evidence that legacy lead-sheathed telecom cables are a significant source of lead exposure or a public health concern. The representative additionally stressed the importance of safe work procedures in the telecommunications industry in avoiding worker exposure to lead.

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