| One Person's Trash Is Another Person's Treasure Selection: France Telecom By Sean Williams | More Articles | Save For Later 
January 17, 2013 | Comments (0) Two months ago, I announced my intention to create a portfolio composed of 10 companies that investors have unjustly cast aside. My goal in creating the One Person's Trash Is Another Person's Treasure portfolio is to highlight just how successful value investing and contrarian viewpoints can be, as well as uncover some great companies that have a good chance of turning their fortunes around. For a more thorough explanation of what I hope to accomplish and how I'll measure my success, I encourage you to visit my portfolio mission statement. For reference, here are my previous eight selections: For my ninth selection, I've chosen international telecom France Telecom (NYSE: FTE ) , a company I own in my personal portfolio. Why traders have given up on France Telecom
"Blame Europe!" That's the most common explanation you'll get to why France Telecom's share price is down in the dumps. High levels of unsustainable sovereign debt in Spain, Portugal, Greece, and Ireland have doomed the EU to widespread austerity packages meant to constrain governmental spending, balance budgets, and bring debt levels back to sustainable levels. Unfortunately, that's left companies like France Telecom, which supply mobile and broadband service across Europe, overly exposed to the economic slowdown. In addition, the emergence of a new low-cost start-up known as Free Mobile has caused France Telecom to restructure many of its contracts to lower prices (and thus lower margins) in order to remain competitive. According to management, it will take the next two years just to get 85% of its customers on new contracts. Finally, France Telecom tested dividend income seekers' patience by reducing its dividend by more than 40% to an annual payout of around $1.07 versus prior annual distributions of $1.85. This isn't nearly as bad as the moves by other telecom providers in the region like Telefonica (NYSE: TEF ) which operates primarily in Spain. Telefonica completely shelved its dividend in 2012 amid major slowdowns in consumer spending throughout Europe. European mobile providers KPN and Telekom Austria have also slashed their dividends in response to slowing demand and a highly competitive landscape. Why investors should trust France Telecom
Considering that Europe's growth prospects appear disastrous for the immediate future, you're probably wondering why I'd suggest a telecom operator like France Telecom. I can think of two primary reasons. One, investors often forget that France Telecom's Orange mobile service is growing like a weed in emerging markets like sub-Saharan Africa. France Telecom operates in 21 African countries at the moment and recently announced plans to enter Benin, Togo, Burkina Faso, and Mauritania, placing it third in African coverage behind only South Africa's MTN and the U.K.'s Vodafone Group. As a massively untapped region, Vodafone, MTN, and France Telecom all have plenty of room for continued double-digit expansion in Africa. In addition, search engine Baidu signed an exclusive agreement just days ago to develop a mobile browser designed for emerging markets like Africa and the Middle East. It may only represent a small portion of revenue now, but France Telecom's AMEA revenue is going to be a major growth driver for the second-half of this decade. Second, it's a sheer case of the price inelasticity of its products. France Telecom's broadband and mobile services have few competitors, and in areas where competition exists, such as in France with the emergence of Free, it has enough free cash flow to price match or even undercut its peers if necessary. Infrastructure build-out is expensive, and with much of France Telecom's infrastructure already in place (and in some of Europe's stronger economies may I add), the barrier to entry in its business is quite high. What you'd get here
Another factor that really makes France Telecom attractive is its overall value as compared to its peers, both in Europe and in the United States. Currently, France Telecom is valued at just 87% of book value, will produce in the neighborhood of $5 billion in free cash flow in 2013, trades at a forward P/E of 7, and pays out a whopping reduced yield of 9%! Simply put, there are few telecoms that will give you access to a stable consumer base and emerging market growth like France Telecom will. In the U.S., stable dividend payers like Verizon, which yields nearly 5%, have no way of accessing emerging markets and are strained to find new avenues of growth. In South American countries like Argentina and Brazil and halfway around the world in Russia, there's practically a dogfight among telecom providers to grow revenue in very saturated regions. But with France Telecom, you get strong double-digit AMEA growth, as well as the stability of recurring cash flow in Europe. It's the perfect value and contrarian play! |
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