Markets & Finance

France Telecom Has a Nice Ring To It


Investors may wish to dial up shares of France Telecom (FTE). On Apr. 6, Standard & Poor's Equity Research Services analyst Cristina Perea upgraded her investment recommendation on the stock to 4 STARS (buy) from 3 STARS (hold).

France Telecom provides consumers, businesses, and other telecommunications operators with a wide range of services including fixed line and mobile telecommunications, data transmission, Internet, and other services. Its well known brand names include Wanadoo and Orange. The company reported more than 130.7 million customers at Sept. 30, 2005 (after giving effect to acquisitions), in 220 countries and territories.

One reason for the company's allure, in S&P's view: Based on its estimates, France Telecom offers investors a high dividend yield for the next three years (estimated at 6.2% in 2006 and 7.2% in 2008). Perea thinks the shares are attractive from a valuation standpoint, recently trading at a 5% discount to its market-based sum-of-the-parts (SOTP) valuation (a method of determing a company's worth by assessing each of its operating units).

INTERNET PRESSURE? Longer term, in S&P's view, the French mobile market remains among the most attractive in Western Europe, with only three network operators and a benign, price-based reseller regime. S&P's discounted cash-flow driven, sum-of-the-parts valuation yields an intrinsic value of €20.3, 10% ahead of the Apr. 5 market closing price.

The main risks to S&P's investment thesis come from stepped up M&A activity by the company and from an unforeseen strong impact of voice over Internet protocol (VoIP), as consumer adoption of Internet-based telephony may accelerate in coming years.


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