Telecom stocks continue to rise in spite of a general fall in equities in 2000. The sector still app...
Telecom stocks continue to rise in spite of a general fall in equities in 2000. The sector still appears to offer meteoric capital appreciation, valuations on stocks are similar but there are differing opinions on which stocks are the most attractive.
So far this year the FTSE Eurotop 300 index is down 2%, in euro terms. Over the 52 weeks to 15 February the index rose by 29%. In contrast the telecom services sub-index has advanced by 13.6% since the start of the year and over 52 weeks has increased by 90%.
With share prices rising the valuations on the stocks are high with the average telecom stock trading on a P/E ratio of 67 times while the Eurotop 300 index in general trades on a P/E of 30 times. Hill Samuel Asset Management is slightly overweight telecoms, and will remain so, but is taking profits as the sector has gone up so fast, according to Adrian Farthing head of European equities at the group.
British Telecom's recent profit warning has deterred Farthing from holding the traditional operators. He says: "The market has underestimated the competition faced fixed line operators, such as France Telecom and Deutsche Telecom. Instead of France Telecom I prefer Vivendi, the utilities conglomerate. Vivendi has a more diverse range of interests in particular cable TV and media companies."
Another stock which Farthing favours is Telefonica, Spain's biggest telecom company. As well as benefiting from a strong domestic market its other positive is its presence in the emerging markets, according to Farthing. He says: "The company is growing fast and is in the best-positioned to profit from internet growth in Spain and Latin America. Last week Banco Bilbao Vizcaya Argentaria, Spain's second-largest bank, agreed developing on-line banking projects with Telefonica."
Ed Protheroe, manager of Aberdeen European Technology unit trust, favours Telefonica due to the chance of consolidation activity among telecom companies worldwide and not the company's internet exposure.
He says: "If I wanted exposure to Telefonica due to its internet resources I could just invest in Terra Network, the company's floated off internet division.
In term of M&A activity there has been talk of Telefonica getting together with Portugal Telecom which would give Telefonica coverage of the whole Iberian peninsula.
Also US companies are looking at global expansion but Telefonica is one of the few operators which would provide exposure to South America."
Protheroe believes consolidation may be a major theme in the 'wireline' market this year. There has been talk of France Telecom buying Orange, according to Protheroe.
He adds: "Deustche Telecom has enjoyed a good run along with the rest of the sector and there is no reason why this should end.
"This year shareholder value will be enhanced by the floating off of the company's on-line and mobile divisions."
Stocks which the Aberdeen fund does hold include, Vodafone, Netcom Norway, Telecom Italia Mobile and Sonera.
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