The Scandal Rocking Wall Street This Week

AT&T (T) and Verizon (VZ) shares have tanked since a Wall Street Journal reportrevealed the telecom giants' historical use of lead-covered cables is contaminating many parts of the country. The threat of potential legal action and uncertainty about how the lead issues will be resolved have prompted multiple Wall Street firms to downgrade the stocks.

“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,” Citi analyst Michael Rollins wrote in a note on Monday.

Citi's warning comes after JPMorgan downgraded AT&T from Overweight to Neutral and cut its price target to $17 from $22 on Friday, citing beliefs that AT&T has the most exposure to the lead issue. Meanwhile, Goldman Sachs highlighted the issue as a “new risk factor for wireline telecom.”

AT&T stock has now fallen more than 10% over the last five days and is now nearing a 30-year low. Verizon stock has fallen more than 10% over the past five days as well.

“Prior to this reporting, we do not believe the market was aware of this issue and our checks with regulatory experts indicate that this issue was not on regulators’ radars either,” Goldman Sachs analyst Brett Feldman wrote on Monday. “We view this as a potential new risk factor for wireline telecom operators with legacy network assets and are therefore not surprised that the market reaction has been material.”

Feldman admits in his note that “investors have many questions, and we have few answers,” a sentiment currently being expressed by other Wall Street analysts as well.

“We see the potential liability as an unquantifiable, long-term overhang for the stock, which adds to the risk premium,” JPMorgan managing director Philip Cusick wrote in a note on Friday.

Shares of both Verizon and AT&T had already been under pressure over the past year amid slowing growth in the wireless business and rumors of Amazon joining the wireless market.

Verizon is set to report earnings and have executives speak on an earnings call on July 25 while AT&T is scheduled to provide results and a business update on July 26.

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