These 2 Cheap Telecom Picks Could Be Top Performers In 2013

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Telecom stocks can be a great long-term investment, especially if a big buying opportunity comes along that could reward investors for many years to come. The telecom sector generally offers a relatively stable business model and revenue base. It also offers growth potential since the global population continues to expand, and also because businesses and consumers are increasingly reliant on mobile phones, Internet access, and other telecom services. Because of that, it makes sense to invest in the sector for the long-term potential that it offers.

Many telecom stocks are quite expensive today, however, there are a couple of bargains in the sector that make sense to buy now. One cheap stock that has been pushed to low levels because of the European debt crisis is France Telecom (FTE). Another telecom stock appears cheap simply because few investors know about the company, which is Iridium Communications, Inc. (NASDAQ:IRDM). Here is a closer look at both of these telecom bargains:

France Telecom shares appear to be one of the cheapest in the sector when you compare it to other major telecom stocks. For example, AT&T (NYSE:T) offers a yield of about 5%, and it trades at a price to earnings ratio of around 16. However, France Telecom trades for just about 7 times earnings and it yields around 10%. That steep discount is a result of the ongoing European debt crisis, which has put pressure on many major companies in that region. While it is true that the French economy is suffering from high unemployment and a weak outlook, it seems that investors are overlooking the fact that telecom companies have a relatively stable business model since businesses and consumers generally need their mobile phones, Internet and other telecom services, even if the economy is in recession.

France Telecom has not just faced a tough economy but also increased competition. In early 2012, a new mobile phone provider named "Iliad" launched services in France and it has already captured about 5% of the market. However, France Telecom is still a dominant force in France and many other countries where it provides services. Plus, it has growth potential in emerging market countries like Libya, Egypt, etc. France Telecom recently announced a joint venture in Qatar in partnership with Sheikh Fahad Bin Ghanem. This adds to the strategic plans for France Telecom to expand into the Middle East and Africa. France Telecom also is working to pay down debt and management has cut the dividend in order to free up cash for this purpose. The dividend cut was another reason the stock was weak in 2012, but since the extra funds will be used to strengthen the balance sheet, it is also a positive aspect for shareholders to consider. Plus, even after the reduction, the dividend yield is still near a whopping 10%. With a cheap valuation, a high yielding dividend, growth potential in emerging markets and a renewed focus to improve the balance sheet, this stock looks very attractive, especially on pullbacks.

Here are some key points for FTE:

  • Current share price: $11.43

  • The 52 week range is $10.20 to $15.87

  • Earnings estimates for 2012: $1.83 per share

  • Earnings estimates for 2013: $1.66 per share

  • Annual dividend: about $1 per share which yields around 10%

Iridium Communications shares also appear very undervalued largely because many investors simply aren't as familiar with this leading satellite communications provider. Numerous investors and consumers know about AT&T or Verizon (NYSE:VZ) because many of them have phone service with those telecom providers. However, Iridium is not your average phone service since it is based on a network of over 60 satellites that provide virtually seamless coverage around the globe. Iridium phones and services can be used just about anywhere on the planet, whether in a remote part of Afghanistan, or a jungle in South America, the North Pole, at sea, or even while in flight.

Companies like Sprint (NYSE:S), AT&T and Verizon have to engage in fiercely competitive markets, Iridium enjoys strong margins and much less competition in its niche market. While Sprint has been posting losses, and with Verizon and AT&T trading at about 16 times earnings, Iridium is a real value based on a number of valuation metrics. For example, analysts expect it to earn 94 cents per share in 2013. That puts the PE ratio at just about 7 times earnings or less than half of some of its better known counterparts. Iridum also looks cheap based on book value which is just over $10 per share. Furthermore, it has strong growth potential in the coming years as it moves forward with a satellite-based aviation tracking network. Investors who get to know this company before the herd, and before revenue growth increases, are likely to be well-rewarded. One top investor sees Iridium shares potentially valued at over $30, by 2017, and that could make this stock a multi-bagger.

Here are some key points for IRDM:

  • Current share price: $7.05

  • The 52 week range is $5.25 to $9.73

  • Earnings estimates for 2012: 83 cents per share

  • Earnings estimates for 2013: 94 cents per share

  • Annual dividend: n/a

Disclosure: I am long FTE, IRDM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.