Dialing for Dollars: French Telecom, Vodafone or DoCoMo
Elise is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I don't know about you, but I'm pretty nervous about Europe. Here we are, watching to see if private investors are willing to take losses of more than 50% on Greece's bonds? Ouch! I don't actually know much about Europe though and so I read this Foolish article with interest. Are there bargains over there? Apparently France Telecom (NYSE: FTE) is one. It's a dividend-paying stock with a market cap of almost $40B, it is based in one of the strongest eurozone country and it is priced with favorable multiples (Forward P/E of 7.9) and P/Cash Flow of 2.2. Two point two? That gets my attention!
However, the risks are substantial and they go beyond the risk that Europe alone presents. The French government owns over 25% of the company and thus plays a significant role in strategy decisions which are likely driven by objectives that are different from the average US shareholder. There are also labor issues in France including the suicides of dozens of employees in recent years; Der Spiegel describes over 60. That sort of puts Foxconn's problems into perspective. Its growth has come from emerging markets including Eastern European countries, the Middle East and Africa. While I'm impressed by how cell phones are radically changing lives in African countries and can appreciate the possibilities for tremendous growth in those markets, there still is a substantial risk due to political turmoil in countries such as Egypt, the Ivory Coast, and Tunisia. My final major concern is that it carries a debt/equity ratio of 1.1. While this is lower than the industry average (2.6), it still feels uncomfortably high to me and prompted me to look for other phone companies with less debt.
Vodafone (NASDAQ: VOD) is a phone company I first stumbled upon in Fiji while I was traveling around the Pacific. It's a UK company with over 350 million customers, making it the second largest phone company in the world (after China Mobile) and the phone company with the largest geographical reach. It has partnership interests in phone companies all over including a 45% stake in Verizon Wireless (NYSE: VZ). With a market cap over $100B, it is fairly priced with a P/B ratio of 1, a P/E ratio of 12 and a P/CF ratio of 7.5. The latter signifies enough cash to handle its acquisitions and pay dividends; its Debt/Equity ratio of 0.4 reflects its financial stability. Unlike FTE, it's not the stepchild of an old phone company monopoly and so it does not have problems with underfunded pensions or entrenched civil-servant employees. Its global reach allows for cost savings as it expands programs from one market to its worldwide customers and this makes it a formidable competitor. Its biggest problems seem to be taking place in India where there are several competing wireless companies and where it faces a potential $2.5B tax (the company is fighting this and the case is in the Supreme Court). A Fool recently described VOD as a potential retirement stock. However, because it doesn't appear to be undervalued to me, I don't think it's something I personally would pick up right now.
All of this thinking about phones reminded me of my phone company in Guam. When I moved there, I had to crash out of my AT&T contract (I'd been trapped by my beloved iPhone) because even though Guam is a US territory, US phone companies don't operate there. This isn't surprising if you've been to Guam; it's a LONG way away. Think about flying between the mainland and Hawaii. That seems pretty far, right? Well Guam is another 8 hour flight beyond Hawaii. Naturally, Guam has ties to Asia and so my phone company there was DoCoMo Pacific, a part of NTT DoCoMo (NYSE: DCM).
DoCoMo's market cap is approximately $80B, placing it's size between France Telecom and Vodafone. It has almost half of the market share in Japan, a country well-known for its technology leadership. DoCoMo made wireless Internet broadly available in Japan in 1999 and was the first in the world to introduce 3G. Japan's appetite for technology means that few of its subscribers are still using 2G and so DoCoMo will be able to shut down that network this year. This will free capital expenditures that other operators around the world have to carry in order to have 2G,3G and 4G networks. The company is also acquiring stakes in phone companies elsewhere in Asia, notably the Philippines (an emerging market with a population of 94 million) and India.
The most intriguing thing about DoCoMo is that its debt/equity ratio is only around 5% and the firm has net cash. There's something very reassuring about that while the world holds its breath and waits for the debt crises to play out. Others must agree, almost one fourth of the company's float was snapped up by institutional purchases during the current quarter. This could be a call that I make.
Motley Fool newsletter services recommend France Telecom (ADR) and Vodafone Group Plc (ADR). The Motley Fool has no positions in the stocks mentioned above. msjeeves has no positions in the stocks mentioned above. 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.