How the European Telecoms Rank
Damon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
These have not been good times for the telecom service providers residing in the European Union of late. The ADRs of those firms, some behemoth-sized, have largely sold off. Fourth quarter gross domestic product in Europe fell slightly, indicating that the struggles may well persist. Still, there are likely some diamonds in the rough. European ADRs are usually good investments for their generous dividend yields, nevertheless. And they currently could prove to be trading at discounts with upside price potential. One exception has been BT Group (NYSE: BT), a company I will highlight last among the group.
Telefonica S.A. (ADR) (NYSE: TEF)
Spain-based Telefonica also operates a unit covering Latin America and Telefonica Europe. Amid a challenging backdrop, management is reorganizing the entity with its digital assets being the focus of activity. The strategy involves promoting the use of smartphones, enhancing its broadband offerings, and increasing network capacity, with the goal of becoming an international online and digital service provider group.
Efforts are being rewarded, as access lines are being added, largely through mobile and mobile broadband connections, as well as strength in Latin America. In all, for 2013, the company is guiding toward revenue growth with modest erosion in the operating margin. The forecast implies a turnaround, and this wouldn’t be too much of a surprise given the increased customer count.
Accordingly, TEF ADRs, yielding around 6% annually, may be poised for a rebound. Trading at significantly below 10 times trailing share earnings, the valuation is favorable. Management is also taking measures to reduce its sizable debt balance. In all, I recommend investors with a risk-tolerant total-return strategy consider the ADRs at this time.
Vodafone (NASDAQ: VOD)
This $125 billion market cap company is looking to growth in data services and emerging foreign markets to offset the effects of the sluggish European economy. The company is also targeting enterprises increasingly and adding new service offerings. As a result, mobile subscriber numbers are slowly on the rise and it is achieving growth in regions such as India. It recently, too, rolled out high-speed mobile services in South Africa, Italy and Greece.
The positive factors should be almost sufficient to offset weakness in Southern European markets this year. As profitability bounces back and conditions improve, Vodafone should return to previous form, if not better. Its long-term plan carries it through 2015, by which time it intends to have fully integrated its “Cable & Wireless Worldwide” business.
VOD is a company with a strong likelihood of a resurgence over the long term. With the shares priced at a sunken level, the current price might be a good entry point. Notably, VOD shares yield about 4% on an annual basis. Finally, the company remains fundamentally sound as compared with Telefonica, based on balance sheet ratios.
FRANCE TELECOM (NYSE: FTE)
France Telecom has seen its stock dive over the course of a couple years due to declining earnings in its home country, as well as in numerous international markets. France has been a tough operating environment, marked by soft demand as well as rising labor costs. As with the previous two companies, the mobile operations have sustained while it confronts competition in core operations.
Management is anticipating a turnaround to ensue in 2014, when more favorable pricing metrics should kick in for the mobile business and costs ought to stabilize. On that note, labor costs are likely to be less of a burden by that time.
Given that the share price is down more than 50% from its two-year apex, if management’s outlook holds true, FTE shares could be a solid choice at this time. Awaiting a bottoming out of the price is advised. As for the debt level, it appears manageable. The dividend, currently accounting for an approximately 15.5% yield, may be in jeopardy of a reduction given free cash flow requirements for property and plant. Accordingly be aware of that possibility when considering investments.
British telecom BT’s earnings have benefited from cost reductions of late. In the meantime, the company is expanding the reach of its broadband network and adoption of services has been strong. Additionally, its Global Services unit, which provides services such as payment, as well as voice and conferencing, recently turned profitable.
The debt-to-equity ratio is elevated, but may be brought down with capital spending requirements falling. BT shares are worth considering by those anticipating an improvement in the operating climate.
At current valuations, equity and ADRs of European-based telecoms seem enticing. Factors to review include the growth strategies and geographical footholds of each firm. They offer generous dividends and could have the potential for price upside as operating results start to turn the corner. The question is how well they can boost profitability in light of decreasing access line (subscription) counts in their traditional fixed-line businesses, as is the situation with telecoms around the globe. A brief analysis indicates that TEF shares are best for the near term, while VOD might be a solid long-term holding.
dctotal has no position in any stocks mentioned. The Motley Fool recommends France Telecom (ADR) and Vodafone. The Motley Fool owns shares of France Telecom (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!