The company should get some interest given its valuation. The stock, using a cash earnings times a capitalization multiplier valuation, seems to be trading at less than a 3.0 times multiple based upon cash earnings of around $6.0 billion and profit margin of 17.2% on sales of $35.0 billion. While it’s probably reasonable to give some discount to Italia given the company’s weak first half results, where revenues fell a steep 7%, the possibility of a beneficial partnership might make the current cut overly pessimistic.
Orange SA (ADR) (NYSE:ORAN), formerly France Telecom, is another leading European telecom provider. Over 50% of the company’s sales are from the domestic French market with the rest spread out over the rest of Europe, the Middle East and Africa. High regulatory burdens and increased competition in Orange SA (ADR) (NYSE:ORAN)’s markets have lead to significant price cuts, lower revenues, and reduced profits. Sales dropped 4.5% in the first half of 2013 and operating income fell a dreadful 11%.
In spite of these headwinds, the company has made some gains. A focus on commercial business helped revive mobile growth in France and Spain with total year-on-year subscribers increasing 3.1%. The company is also expanding its broadband capabilities to lure in lucrative high-data use customers. It has begun rolling out improved 4G LTE mobile networks in many of its major markets and “Fiber to the Home” fixed broadband in both France and Spain.
Though not thought a major deal target nor a significant acquirer, the current market valuation on Orange may generate some attention. Trading at less than a 4.0 times multiple, based on sales of $52.7 billion and cash earnings of around $7.5 billion at a margin of 14.2%, the shares could lift on any signs of business stabilization or additional success in the company’s growth initiatives.
Vodafone Group Plc (ADR) (NASDAQ:VOD) is another European telecom to watch. The company has some substantial operations outside the U.S. Its Northern & Central European markets account for about 47% of the company’s $66 billion in sales. Businesses in Africa, Asia and the Middle East and Southern Europe generate the rest. Vodafone Group Plc (ADR) (NASDAQ:VOD) is also looking toward broadband growth to offset its lagging mobile markets, where revenues dropped 3.5% in the latest quarter.
The acquisition of Germany’s largest cable TV company is its most noticeable move in building out broadband but Vodafone is also looking at a major investment plan called “Project Spring” to develop high-capacity data service across Europe and the emerging markets. After the Verizon deal closes, Vodafone will be left with roughly $30 billion to invest. This cash horde provides the company a lot of resources and options to improve its network.
Vodafone shares might look most intriguing after the U.S. assets are divested. Given the company’s remaining businesses look to deliver revenue of around $66.0 billion and cash earnings of near $9.5 billion at a profit margin of 14.4%, its reasonable to expect the residual “stub” shares could be worth something in the $10 area assuming a slightly optimistic 5 times multiple.
Conclusion
It looks like many large telecom operators see attractive opportunities in the European market. As they seem willing to drop billions of dollars into the region, individual investors might want to consider the area as well. Though the operating environment isn’t very friendly, companies like Telecom Italia have been making adaptive moves. Moves that, if successful, could offer noticeable upside for those discounted European telecom shares.
The article Is it Time to Consider a European Telecom Provider? originally appeared on Fool.com and is written by Bob Chandler.
Bob Chandler has a long position in Telecom Italia (ADR). The Motley Fool recommends Orange (ADR) and Vodafone. The Motley Fool owns shares of Orange (ADR).
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