Qualiport

Telecom Companies
Friday, 20 November 1998

Are you mobile yet?

The Telecommunications sector has outperformed the market by over 60% in the last twelve months. Given that in that time the Footsie has appreciated by just over 10%, it is not hard to work out that the Qualiport has missed out by not having one of these companies amongst its constituents.

Do we feel bad about that? Sure it would have been nice, but it is far from the end of the world. The Qualiport also hasn't owned a company from the IT sector, such as Logica (LOG) or London Bridge Software (LNB) -- both companies have outperformed the index by over 100% in the past year. In fact, we would have to have been either very lucky or very skilful (or perhaps both) to have owned those two companies and, say, Colt Telecom (CTM) and Orange (ORA). We'd also have had a massively outperforming portfolio, but hey, thems the breaks.

This Qualiwatch series is attempting to identify the best companies in the world. We've already looked at the Technology and Internet sectors, and today we will start looking at the Telecommunications sector. One thing I don't like doing is chasing the hot sector, yet it looks like we are exactly doing that here. But there is no doubting that this is a growing industry. Just look at the explosive growth of the Internet, and you can see the need for more communication capacity. No matter where you are reading this article from, you will be using some form of communication system to access it. That could be down the phone line or via a landline at the office, but someone somewhere in the communications industry is making money whilst you are ready this article.

Love 'em or hate 'em, mobile phones are here to stay. They're so here to stay that the UK penetration rate is forecast to grow from below 20% now to above 50% by 2002. If you don't own a mobile phone now, there's a one in two chance you will within the next 5 years. Before looking at the possible winners in this sector, it is worth me noting my fears about an investment in a mobile phone company.

The Qualiport's preferred valuation period is 10 years. The City is far too obsessed with 1998 and 1999 earnings estimates and prices companies according to their short-term growth projections. This is because the Wise don't buy and hold shares. Why? It's simple. The big investment banks and brokerage houses make money from their customers when they trade. So they actively encourage people to trade rapidly. It is quite common for a broker to issue four different recommendations about a share in the course of a year. First it may be a "buy," then an "accumulate," followed by an "underperform" and finally back to a "buy" again. In that time, the chances are that when measured from the start of the year to the end, the underlying share price will have remained largely unchanged. Yet the broker has tried to get you to make at least 4 trades. This commission goes straight into their sky rocket. Next time anyone is tempted to buy or sell a share on a broker recommendation -- don't. Firstly, always make your own investing decisions, and secondly, think about why that broker is making that recommendation.

Sorry for that little diversion. When I think about the hypocrisy of the Wise, I often go off into my own little writing spasm. It's involuntary. Back to my mobile phone fears.

In five years' time, when just about everyone who ever is going to own a mobile phone will have one, where's the growth going to come from? On top of that, what's going to be the overriding factor that makes you choose one mobile phone company over another? In my view, the answer is all going to come down to price. Service will also be a factor, as it is in any industry, but price will be the ultimate competitive factor, and that's not good news for long-term investors.

Having said that, it would be foolish (note the small "f") not to look at the players in the mobile phones sector. It is just impossible to ignore the growth prospects. It is also one of the relatively few sectors where the UK can compete on a worldwide basis. Vodafone (VOD) has operations in many European countries and far away places such as Australia and New Zealand. Orange are just starting to expand their international presence.

As far as the Telecommunications sector is concerned, I don't propose to look for companies that are not UK based. It is difficult enough to get a handle on all the UK based companies and their business models without trying to look at international companies. An important aspect of stock analysis is to make sure you look at the competition. Living here in the UK, we can at least get a feel of how a company is progressing and who its competitors are. If we suddenly looked at, say, Telstra in Australia, how would we know what's happening to the telecommunications market, what their competitors were up to -- basically, how would we find out what their business plan is and how they will execute it? Sure, you can read the annual report, and it is always essential to get a feel for the numbers, but it only tells you part of the story, and from a quite biased perspective.

Here's the shortlist for mobile telecommunications companies.

Orange -- the newest of the four UK operators. In a relatively short space of time, they have built a very strong brand name. In my own little one person survey, when I asked myself to name a mobile phone brand, I said Orange. Having a strong brand name is good, but as I said earlier, when companies are competing on price, brand name will have less significance. The company is still loss making but is forecast to move into profit next year. Sales have grown from £123m in 1993 to £914m in 1997.

Vodafone -- the established leader. Has been profitable for many years. Sales for the year ended March 1998 were £2417m. Vodafone is strong amongst business users, and they are the most profitable customers. Vodafone is well established internationally and plans to keep that expansion momentum going. For example, the company has recently moved into Egypt. This week Vodafone reported a 40% jump in earnings per share (EPS) for the first half of fiscal 1999 and had over 7 million customers.

That's it. When I said shortlist, I meant shortlist.

Well, it's not quite it. As most of us know, there are two other mobile phone operators in this country.

One-2-One -- Part of the Cable & Wireless (CW.) group. It's a bit harder to get a handle on the numbers of just the One-2-One business, because they are consolidated into the CW numbers. We'll probably leave them to our non mobile telecommunications shortlist.

Cellnet -- 60% owned by British Telecommunications (BT.A) and 40% by Securicor (SCR). Like One-2-One, we'll look at Cellnet if and when we consider BT.

As a gut feel, however, these last two companies may be behind the game. Although they may now be trying to make up for lost ground, the market leaders are hardly resting on their laurels. Perhaps they have suffered because they have been seen as a smallish part of a big company. The whole Orange and Vodafone companies are focussed on just one thing.

Next Wednesday, we'll look at our shortlist of traditional telecommunications companies. This is an exciting sector, set to grow on the back of the explosive growth in the Internet world. The MCI Worldcom vice chairman yesterday said that the Internet will account for 99% of the US domestic bandwidth by 2004. Amazing.

The Qualiport numbers on this page are as at the close of play on Wednesday. They will again be updated on Monday. But all is far from lost. If you click on this link, you can see the current prices of the six Qualiport shares. Pretty groovy, hey? If there are more smiling faces than not, the chances are that we're happy, too. In fact, you can obtain the current share price of any company by entering its Epic symbol into the box at the top left hand corner of each web page.

Have a great weekend, Fools. Please let us know what you think about the Telecommunications sector -- be a Fool; post a message.

Bruce Jackson (TMF Googly)

Qualiport Numbers

                    23/11/98 Close

              Company   Change    Bid
               EMA      0.15     11.20
               IIG      0.00      2.00 
               MKS      0.14      4.52
               PIZ     -0.05      7.95 
               RTO      0.02      3.57
               ULVR     0.00      6.48

Qualiport Stocks

Last Rec'd  Total #  Company   In At   Current   Change
 19/12/97    783       RTO      2.55     3.57     40.0%
 04/11/98    245       PIZ      7.93     7.95      0.3%
 17/07/98    298       ULVR     6.72     6.48     (3.6%)
 17/04/98    169       EMA     11.85    11.20     (5.5%)
 11/05/98    368       MKS      5.54     4.52    (18.3%)
 27/10/98    755       IIG      2.58     2.00    (22.5%)

Last Rec'd  Total #  Company   In At     Value     Change
 19/12/97    783       RTO    2046.53   2795.31   748.78
 04/11/98    245       PIZ    1966.34   1947.75   (18.59)
 17/07/98    298       ULVR   2052.54   1931.04  (121.50)
 17/04/98    169       EMA    2052.57   1892.80  (159.77)
 11/05/98    368       MKS    2054.11   1663.36  (390.75)
 27/10/98    755       IIG    1972.64   1510.00  (462.64)

Cash:                                     £3,975.57
Current Total :                          £15,715.83

Total Invested:                          £16,184.62
Profit/(Loss) :                           (£ 468.79)

Value Per Share

                   Day     Month     Year     History
Qualiport         0.68%   -1.55%    29.36%    32.28% 
FTSE 100          2.29%    7.54%    13.88%    16.50%
FTSE All Share    2.03%    6.38%    10.52%    12.84%

For an explanation of Value Per Share accounting, please click here.