For investors in the telecoms industry, the next few years are set to be hugely turbulent. That’s because the level of competition in the industry is expected to grow, with a number of companies set to enter the mobile telecoms space and many others due to begin offering fixed-line packages to their customers.
In fact, the advent of quad play (the offering of broadband, pay-tv, fixed-line and mobile telecoms) is a major change for the media industry as a whole. Certainly there will be winners from the change, but there will also be losers. And, on this front, it appears as though Vodafone (LSE: VOD) will fall into the former category and BT (LSE: BT-A) into the latter.
Of course, BT is a dominant player in the fixed-line and broadband sectors. It has increased its customer base in recent years at a rapid rate and has been able to most successfully market the benefits of superfast broadband. However, its strategy of winning new customers on heavily discounted deals appears to be taking a toll on its bottom line. In fact, BT’s earnings are set to fall by 3% in the current year and, as well as high discounts, the investment in new products such as pay-tv has also caused BT’s short term financial performance to suffer.
Furthermore, BT’s strategy of moving into pay-tv and mobile is taking place at a rapid rate. For example, it launched BT Mobile recently but has also bid £12.5bn for mobile network EE. This may give BT access to the largest number of subscribers in the mobile space but, with a balance sheet that remains less robust than its investors would like, the company appears to be taking considerable risks in order to expand its product offering. For example, BT has a pension liability of £7.5bn as well as debt of £9.8bn on its balance sheet, with net assets being just £800m.
Vodafone, meanwhile, is also embarking on an expansion of its product offering. Like BT, it is making acquisitions (such as Spain’s Ono and Kabel Deutschland), but unlike BT, Vodafone appears to have the balance sheet to withstand such activities. In fact, Vodafone has a pension liability of just £600m, total debt of £35bn and net assets of just under £68bn. Therefore, its balance sheet seems very capable of coping with higher levels of borrowing to fund further acquisitions without incurring excessive levels of risk.
Looking ahead, Vodafone’s forecasts are very positive. The company is expected to deliver a rise in earnings of 20% next year, which puts it on a price to earnings growth (PEG) ratio of just 1.8. This indicates that its shares could move considerably higher and, with it having a high exposure to Europe, the impact of quantitative easing could provide a boost for its bottom line over the medium to long term. And, with Vodafone set to expand into new product areas, its customer base could increase and positively impact its financial performance, too. As a result, now appears to be a good time to buy a slice of it.
