Top 10 trade ideas for 2014. Proposition #8: The renaissance of the telecom sector
Over the past years, the telecom sector had been lagging the market, particularly in Europe and in the US. There are a number of reasons for this: a) telecom operators run a highly cyclical business, and with the financial crisis taking its grip on day-to-day consumer spending, operating profits have fallen, b) the introduction of VoIP (e.g. Skype, WhatsApp, Whispers) means that consumer behavior has changed at the expense of the traditional operators, c) in terms of provision capacity, the traditional operators have had to make significant efforts to build adequate infrastructure to serve 3G clients, and lately 4G clients.
The problem which arises now in crowded areas like city centers, high-rise buildings and railway stations, is that system capacity is being reached relatively quickly because more than ever, consumers are consuming online during their spare time. Endlessly increasing the distribution network is no longer possible (wireless smog, consumer protection organizations, etc.), therefore telecom operators need to create a different business model when it comes to servicing and charging clients. So far, only a very few telecom operators are in the process of adapting their pricing model (e.g. from pay for getting data access always to pay for getting data access on a priority case-basis).
It is only very recently that the telecom sector in Europe and in the States has regained traction: ongoing M&A talks, attractive dividend payouts, and the introduction of share repurchase programs have helped to make these stocks attractive. Furthermore, and according to the latest fund manager survey by Merrill Lynch, the market is still under-owned by investors, hence reducing the downside risk in the case of a market correction compared with other well valued sectors. Investors with a higher risk/reward ratio can to invest in telecoms with a strong operating base in the European peripheral market where the upside potential is the highest.
But in the Far East too, the internet space is undergoing a structural transition. More than ever, third generation (3G) subscriptions are being taken up while operators are gradually starting to deploy fourth generation (4G) subscriptions, putting emphasis on the use of mobile computing devices such as smartphones and tablets. Currently, the mobile penetration rate remains low in China, but given the expected strong consumer demand there, it is likely that mobile services will help drive telecom and internet company earnings going forward. These assumptions are based on the strong push for mobile related business opportunities by two major companies in the region, i.e. Baidu, one of China’s leading internet search engines with a variety of services and mobile applications, and Ctrip, China’s leading online travel agency. These results are expected to be above those of comparable sectors.
A selection of sleeping telecom beauties:
Top 10 trade ideas for 2014 Proposition 8 The sleeping beauties.pdf
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