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MARKET COMMENT
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Long-term fans of the telecom sector should not give up on Cable & Wireless (LSE: CW.)(NYSE: CWP). The telecom company today updated shareholders on its current trading, revealing difficult trading conditions at its core Global IP operation. However, the prospect of this division becoming free cash flow positive within eighteen months, combined with the group's substantial cash pile, should persuade investors to stay put. Today's statement confirmed C&W's Global business had seen first-half turnover decline 6%. Falling sales at the group's US voice-based business (sold on Tuesday) and continued pricing pressure in the IP market were to blame. Gross margins remaining steady, operating costs being trimmed and a 30% capital expenditure reduction were the other financial highlights. Down 2.5p (1.8%) to 135.5p in early trade, C&W's share price values the whole firm at around £3,200m. C&W revealed its cash pile -- a significant competitive advantage in the telecom sector's current turmoil -- would be £2,200m at the end of September. If you also consider C&W's steady, traditional telecom business based in the Caribbean, which has annual earnings of at least £200m, then the Global operation is effectively in for nothing. But how much C&W's presently loss-making Global business will be worth in the future is anybody's guess. Bears point to the airline industry as a comparable; another sector characterised by growth, intense competition and substantial asset expenditure -- and where the participants have failed long-term shareholders. On the other hand, bulls provide the last-man-standing argument; as WorldCom and the rest go bust, C&W will be left to clean up. Given the current valuation, shareholders convinced about C&W's prospects certainly shouldn't bale out now. But for those undecided, it's difficult to argue against other blue chips with proven records of profitability and more obvious share price value.