Should you invest in smartphone stocks?
European telecoms took a beating during the recession. Many Eurozone companies actually saw revenue growth fall by between 2 per cent and 5 per cent in 2012 over 2011, said Nichols. That trend is continuing. First-quarter revenues for Deutsche Telekom have dropped 4.5 per cent year-on-year. Orange, Telecom Italia and KPN have seen similar revenue decreases. In addition, several companies have slashed dividends, such as Spain’s Telefonica, which has seen its stock price plummet 53 per cent over the last five years.
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In general, revenues and earnings for emerging-market telecoms are growing at a double-digit rate, much faster than the mid-single-digit growth for companies in developed nations. There are two main reasons for the speedier growth. Many companies in markets such as Thailand and Indonesia have less-developed landline businesses than operations in developed countries do. That means that if people want to talk on the phone, they have to buy a mobile device and that means more revenues for these telecoms. Also, Chinese smartphone manufacturers, such as Lenovo and Xiaomi, have developed cheap phones that sell for about 1,000 renminbi (US$160), said Christine Tan, a portfolio manager with Excel Funds Management. Now many more people can afford a smartphone. She points out that Chinese-made mobile devices account for 30% of global smartphone and tablet production. However, investing in emerging-market telecoms is not all upside. Tan specifically cautioned investors to avoid India, where there’s a lot of competition. While the country’s smartphone use is increasing, brutal price wars have depressed revenues. The best investments are ones in “rational” markets, said Tan, such as Thailand, Morocco, Indonesia and Nigeria. These are places where there are only two or three main players and where data revenues are low, but growing. China, for example — it is still considered an emerging market in the telecom sector — has a higher smartphone penetration than many other emerging markets, with nearly half the country using one, according to Goldman Sachs. The investment firm said it should catch up to US levels by 2015. Nichols pointed out that valuations can vary wildly. There are companies trading at three times EV/EBITDA, while others trade at around seven times, if not higher. Tan looks for businesses trading at more “reasonable” multiples of about five times. Navigating North America
Canada and the US have the most stable markets. Revenues are only expanding in the mid-single digits, but they are growing. According to eMarketer, smartphone penetration in both countries is between 51 per cent and 55 per cent, and is expected to hit nearly 80 per cent in four years. Indeed, penetration will eventually reach 100 per cent or even more if people start owning more than one smartphone, according to eMarketer. Most companies also pay attractive dividends that are, unlike in Europe, not at risk of a cut, says Shivram. AT&T, for example, has a 5 per cent yield, while Canada’s Rogers Communication pays 4.2 per cent. “[North America) telcos are more of a bond proxy,” said Tan. “They have low growth, good free cash flow and they reward shareholders with bond buy backs and dividends.” US and Canadian telecoms trade for higher multiples than those in other countries, which makes them somewhat less attractive, financial experts said. Companies have historically traded for around six to seven times EV/EBITDA and, said Nichols, they’re trading at the higher end of that range today. That’s partly due to the reliable earnings — investors have snapped up the stocks since they know what they’re getting. At the same time, income-seeking investors have jumped into these stocks purely for the dividends. What’s the best buy?
Every region has opportunities, but investors should first be clear about what they seek. If you’re looking for undervalued operations and can be patient, then Europe has the best buys of any region, said Nichols. More risk-averse income investors, though, may want to own the large North American businesses. For growth-oriented buyers, attractively valued emerging-market telecoms are a good bet, though Tan notes the long time horizon required here. No matter the region, consensus suggests that it’s hard to go wrong with a telecom in your portfolio. “There are good companies all over the place,” said Nichols. bbc
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