Cable & Wireless Communications joins 2012's list of mid-cap fallen angels.
While the 2012 results season so far has been relatively strong for blue-chip firms, the same can't be said for mid-cap companies.
The first six weeks of this year have produced a string of profit warnings from FTSE 250 members, especially those heavily exposed to UK consumer spending. Then again, even businesses with little or no exposure to the UK face a different set of problems overseas.
CWC shares slide
Take, for example, Cable & Wireless Communications (LSE: CWC), which was split off from Cable & Wireless Group in March 2010.
The UK-listed company provides TV, broadband, mobile and fixed-line telephony, and data solutions to consumers, businesses and governments in four key overseas markets: the Caribbean, Panama, Macau and Monaco & Islands.
However, in nearly two years since its demerger, CWC's share price has dived as its revenues and profit margins have been hit by increased competition and closer regulatory scrutiny. This morning, CWC released its results for the three months to 31 December, which sent its share price plunging 11% to 38.7p as I write.
Problems in Panama
CWC's problems stem from delays to signing corporate and government contracts at its Enterprise business, as well as heightened competition from rival mobile operators in Panama.
The telecoms company was hit by a regulatory change in Panama that allows customers to switch mobile networks without changing number. While number portability is great for consumers, it is sure to erode margins in Panama, which accounts for a fifth of CWC's revenues.
However, CWC produced a strong performance in Macau, with earnings expected to be "marginally" ahead of the $150 million to $160 million previously forecast. Similarly, the firm's Bahamas unit was trading ahead of expectations, with earnings expected to exceed forecasts of $60 million to $80 million.
CWC is not for me
My first concern is that CWC is quite highly geared. It has net debt above $1.4 billion (£885 million), which is almost 90% of its market value of nearly £1 billion. However, the company recently refinanced $1 billion of its borrowings and thus has no significant debt maturities until October 2016.
However, CWC trades on undemanding fundamentals: its shares are priced at 10.5 times forecast earnings, and offer a huge forward dividend yield of 11.1%. However, this payout is covered only 0.8 times by earnings, so it will be cut unless CWC's performance improves markedly.
Personally, I prefer the global reach and brand power of telecoms Goliath Vodafone (LSE: VOD) to CWC's concentration in certain markets. In short, why risk buying one of the rest when you can buy the best?
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