France Telecom (FTE) is the dominant force in the French telecom market. It's the owner of Orange and gets 15.7% of its sales from this source. Its closest competitors include Iliad (OTC:ILIAF) and Vivendi SA (OTCPK:VIVHY).
Reasons to buy:
- France Telecom is very undervalued right now. It has a P/E ratio of just 6.8 compared to an industry average of 31.8. It also has a Price/Sales of 0.6 compared to an industry average of 1.4.
- A discounted cash flow reveals that there is a potential 81% upside with a price per share of $22.00 (here). Also, a comparative multiple analysis reveals a 175% multiple potential with a potential share price of $34.00 (here). Therefore, it is clear that FTE is seriously undervalued at its current share price.
- The company is also expanding rapidly. Last year it spent EUR 6.711 billion on CapEX a EUR 600 million increase on the previous year. It also have very low debt and its Debt/Equity of 1.2 is half the industry average of 2.4. It also have a very healthy ROE TTM of 13.3% which is more than double the industry average.
- France Telecom's merger of its UK operations with Deutsche Telekom (OTCQX:DTEGY) will provide the company with important cost savings over the coming years. Orange is also expanding rapidly within Africa boosting FTE's sales and profits in this region. Furthermore, in Spain, the company's revenue is also increasing because its branding in low cost in this particular area so many Spanish customers hurt by the crisis are turning towards FTE as the cheap option. Much of France Telecom's growth is coming from emerging markets which is very good for the company's health over the long run. However, there is a danger it could run into political problems as many governments in these countries, particularly in Latin America, are fairly hostile to foreign companies.
- The projected annual dividend yield for the company is 12.43%. It pays a dividend twice a year and the last payment was 74.80 cents per share on the 4th September 2012.
Consequently, I would recommend this stock for both dividend and value investors. It is very undervalued at the current share price and provides a lucrative dividend, one of the highest on the New York Stock Exchange. It still has strong free cash flow of over EUR 6 billion so it should be able to comfortable maintain the dividend while keeping up capital expenditures.