Partner Communications Company (PTNR) is one of the three largest cellular providers in the country, reaching more than 98% of Israel’s population using the brand "Orange". Its two largest competitors are Bezeq (OTC:BZQIF) (under the Pelephone brand) and Cellcom (CEL).
The three companies boast market caps of 2.39B (Partner Communications Company), 2.79B (Cellcom), and 6.7B (Bezeq) (diversified). The sheer sizes of these three have allowed them to become an oligopoly of power, creating stringent barriers to entry. Other service providers, due to costs, will piggyback off one of the Big 3’s already established network.
Israel recently began a reform that would reduce the grip of the "Big 3" on the market by offering other telecommunication companies incentives to expand their own networks. This reform was said to have been completed in April of this year. Here is what the communications minister of Israel had to say:
This will complete the reform in the communications market, which aims to increase competition in the cellular service branch. The tender’s results are expected to transform the cellular market in Israel. A more competitive market will reduce prices, improve consumer’s services and of course, will upgrade the technological innovation.
Although this may sound as though the Big 3 are going to be losing their market share, the communications minister continued to say that he expects for the new companies to have 90% of the country covered in 7 years.
That is a large time frame with profit potential. Out of the Big 3, Partner Communications is a stronger investment than Cellcom, and Bezeq is only traded on the Tel Aviv Exchange with debentures on both the Tel Aviv and Luxembourg Exchanges.
I will only be using Partner Communications and Cellcom in the analysis. They both operate in the same industry and are similar in size. Bezeq, although with a heavy arm in telecommunications, offers a plethora of services beyond both Partner and Cellcom.
The book value for both companies are negative. Meaning, if the companies were to go bankrupt the stock is worthless and you will have zero claims on any debts. However, it is unlikely that either of the companies will go bankrupt as they are the largest cellular providers in Israel. Price to sales has them essentially equal in value, but Partner Communications has a little room to grow.
Another key factor in the telecom industry is the “churn rate” – how many subscribers change services. Due to statutes passed in Israel that allowed for easier termination of contracts, all Israeli cellular providers are experiencing a churn rate between 7% and 7.5%. So, it is essentially a null ratio in this case.
This is normally a good indicator of where a company is heading, and while it does show who is making more on the bottom line, it warrants a look at the average monthly revenue per user. Partner Communications was at 115, a 5% decrease from the same time last year. Cellcom was at 115.2, a 17% decrease from the same time last year.
So, why is Cellcom on top if the company is losing revenue at a rapid pace?
It is the size of the company. In the telecom industry, the larger you are the more profitable you tend to be - it is a very expensive industry to build in, but the rewards are great.
Return on assets is nothing special, roughly a half a percentage point difference. Return on equity is huge; essentially, from a fundamental standpoint, $1 invested in Partner Communications nets $1.91 for the company, but $1 invested in Cellcom generates $3.31. From that standpoint, Cellcom wins.
Before we can say which company is better, we need to look at the return on the investments, because again, in the telecom industry, size can often equate profit, but it doesn’t mean smart management. Looking at the return on investments we see that Partner Communications trounces Cellcom by almost 8%. This is essentially saying that Partner generates about $00.08 more in revenue through investments than Cellcom.
While that may not sound impressive to start, one needs to keep in mind that Cellcom's subscriber base is down 17% from the same time last year, in comparison to Partner's, which is down 5%. While both companies have unquestionable staying power, it is better to be invested in the one that is growing and not the one that is falling behind.
The Israeli telecom industry is turning into a big business. Israel leads the world in per capita usage of cell phones, and the market is still expanding. Currently, the barriers to entry remain enormous, providing some protection to the industry. The government influence, while picking up, won’t impact the future growth of the Big 3. The churn rates, mentioned above, were due to easier contract termination laws being passed, and while churn rates will be persistent, they will die down. The key thing for the telecom industry is strong branding to help reduce the churn rates, and Partner Communications has one of the strongest brands (“Orange”) in Israel. This has allowed the company to have a lower churn rate than its competitors over the past several years and it will be the same branding that keeps users in the future.
Investors looking for a solid telecom yield need to look no further. Partner Communications offers a 12% yield with a more than stable cash flow and smart management that knows how to make your money grow.
Buy Price: $15.00-$15.30