France Telecom: A telecommunications/broadband play at a bargain

Posted May 20th 2008 5:23PM by Joseph Lazzaro
Filed under: Stocks to Buy

Readers of this space know that the investment bias is toward large-cap companies with demonstrated business models and who have a competitive advantage in established markets, preferably with a favorable global trend as a support. But every once in a while an exception is made, and with the aforementioned in mind France Telecom is worth a review.

France Telecom SA (ADR) (NYSE: FTE) is a major telecommunications provider in France and also operates broadband, IP protocol, and audio-visual content businesses.

Analysts really like FTE's 49% market share of France's broadband market. Analysts also expect France Telecom's broadband business to offset a decline in landline telephone revenue in FY 2008.

Meanwhile, wireless revenue is expected to increase at an adequate rate in FY 2008 (as it did in FY 2007), led by a strong home (France) market. In all, FTE boasts about 23 million wireless subscribers.

Further, France Telecom's cost cutting and efficiency improvements continue to enhance the bottom line, and the company's transformation program has also better-coordinated marketing programs, among other benefits. The Reuters FY 2008/FY 2009 EPS consensus estimates for FTE are $2.42 to $3.11

Finally, FTE's p/e of 9 lowers the risk/return: the view from here is that this ADS is undervalued.

The risks? Analysts are keeping an eye on FTE's landline competitors, particularly voice-over-internet telephone service providers, and the company's cost cutting efforts.

Stock Analysis: France Telecom is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than 2 years should be rewarded from FTE's shares. Sell/Stop Loss if you were to purchase shares in this company: $18.

Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.

Tags: broadband, cell phone service, France Telecom, FTE, internet, mobile phone service, telecommunications