In a previous report on Deutsche Telekom (DTEGY.PK), we recommended a long position on the stock based on its results, which were in line with the expectations of both analysts and the company, maintaining DTEGY's outlook for the full year. The company generated revenues of almost 29 billion Euros on earnings of 0.9 billion Euros in the first half of 2012, which increased by 13% from 1H2011. Moreover, its affirmation that it will pay dividends of 0.70 Euros/share has reflected well in its stock, which has appreciated by 6% since the earnings release. Dividend affirmation comes as good news, especially amidst the backdrop of other telecom operators slashing their payouts.
Overall, it was a relatively disappointing half for the company's European operations, which reported a revenue decline in both quarters. However, DTEGY is not alone in this regard, as most telecoms operating in the region have had to deal with tough economic conditions and lower consumer spending. However, despite the harsh trading climate in Europe, and because of the company's geographical diversification, it has been able to control the slowdown through its operations in North America, which reported a healthy growth in revenues in the first half of the year. T-Mobile, a subsidiary of DTEGY in the U.S., continues to do well in the mobile business, as compared to its fixed line business, which reported a decline in revenues of 4%. Total prepaid customer additions in the quarter were 227,000 customers, showing an impressive improvement from the 70,000 losses in the second quarter of the previous year.
However, a problem area for T-Mobile remains its contract-based subscriber losses, which lost almost 550,000 subscribers in the second quarter. For the second half of the year, the company may see even more postpaid customer losses, especially because of the upcoming launch of the iPhone 5; however, offsetting the lack of iPhone sales will be the new Samsung Galaxy S3, which is already doing well in terms of sales. T-Mobile currently doesn't sell iPhones, but has significant exposure to Samsung products, and Samsung sales will help boost its postpaid numbers. Moreover, it is expected that it will get the iPhone in 2013, which will be very beneficial for the company, as it has lost customers to other telecom operators over the years. T-Mobile is spending around $4 billion to upgrade its network, which will aid the company in recovering several customer losses as well as provide better network speeds to its customers. It is also trying to modernize its network for high speed wireless services through its spectrum swap with Verizon Communications Inc (VZ), which if approved, will help it expand its coverage to 60 million more people.
From an overall group perspective, DTEGY has done well in terms of earnings growth. In the first half, it increased its earnings by almost 20% with a rise of 5% in the reported EPS. Gross margins, even though stable at around 40%, are higher than its peer Vodafone (VOD), which has also suffered from the slowdown in consumer spending. Despite the stable gross margins posted by the company, its operating margins have been on an upward incline. The company has a healthy cash position with almost 5 billion Euros in cash and short term investments on its balance sheet. Moreover, its generally inclining cash flows from operations are sufficient to cover its dividend payments, which equaled almost 3.5 billion Euros in the financial year ended 2011. The stock yields 7.1%, which has slightly reduced from the last time we studied the stock, due to the recent price appreciation.
DTEGY is trading at cheap valuations, as reflected in the table below, indicating that the stock is currently undervalued. It has shown an exceptional earnings growth, both on a quarterly as well as sequential basis. An increase in earnings in the second quarter represents a growth of over 75% on a YoY basis, and 175% on a sequential basis.
Qtrly earning growth
Another telecom that has done relatively well in the current European crisis is France Telecom (FTE). In recent times, it had faced intense competition from the new mobile operator, Lliad, which continues to offer services and plans at very low prices. Despite this competition, the company has shown an improvement in its metrics in the second quarter of the year, losing around 150,000 customers as compared to 600,000 in the first quarter. Moreover, the second quarter also ended with a return to growth in the postpaid customer base. It is also the other global telecom group that has affirmed its dividend payout policy. It yields 12.5%, which is very attractive from an income perspective. FTE paid total dividends of 2.4 billion Euros in the first half of the year, well supported by the company's operating cash flows of 4.2 billion Euros.
Like DTEGY, FTE is also trading at cheap valuations, as depicted by its trailing P/E multiple of 8x, at a discount to the industry multiple of 11.3x. P/S is also low at 0.6x as compared to the industry multiple of almost 0.9x. On a forward P/E basis, the stock is trading at 8 times its forward earnings, which is a 30% discount to the forward P/E multiple for Vodafone . The stock has done well since we last studied it, appreciating by almost 10%. For a detailed analysis on FTE, click here.