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Telecom Leader Enjoys Subscriber Sprouts Under the iPhone Sky

April 10, 2014 | About:

Japanese society is highly technological. In Japan, innovation races faster than in the rest of the world, and consumers run on par with it. In this business environment, success is for pioneers, and NTT DoCoMo Inc. ADR (DCM) is certainly one of them.

As such, the company introduced wireless Internet access through its i-mode service in 1991 and it also provided the ability to use a handset like a credit card. Moreover, it was the first to launch LTE services in 2010, almost two years ahead of its competitors.

Being in the technological forefront has garnered DoCoMo over 43% of the wireless market, thereby positioning it as the largest operator in Japan.

Building Leadership Upon Innovation

Providing users with the latest technologies has made a great contribution to DoCoMo’s ability to retain customers. Thus, its monthly churn rate of only 0.82% is one of the lowest in the world. This important achievement has increased the long-term value of its customers, which is a key factor in its power to generate strong returns on capital.

In addition, the firm’s first-mover launch of LTE generated a gain of 14.2 million subscribers to this service during the first year, who benefited from higher speeds of up to 150Mb/second on its wireless network in the Tokyo, Nagoya and Osaka regions. Making the most of its two-year advantage over its rivals, the company rapidly extended the service to many more cities, presently covering around 70% of the population. Further, it expects to attain a 98% reach by the end of 2015.

The offering of LTE services provided the firm with an additional benefit, pushing smartphone subscriber base up to 20.5 million, which represents a 70% year-over-year increase. In turn, this bolstered data usage, thereby making data services hit 68.1% of DoCoMo’s total service revenue, one of the highest percentages in the world.

A Step Ahead of the Competition

Apart from boosting profits, the company has made good use of its sturdy cash position building a superior network than its competitors. As a result, it reduced costs by keeping most of its calls on its own network, which has carved the firm a narrow economic moat.

Also, for the first time since December 2011, DoCoMo has been able to surpass its two major rivals Softbank Corp. (SFTBF) and KDDI Corp. (KDDIY) in the number of new subscribers, reaching a total of 62.2 million users. DoCoMo’s spokesperson Hiroko Shimoyama attributed these gains to the addition of Apple Inc. (AAPL)’s iPhone. The firm had initially avoided including this handset to its portfolio in order to prevent Apple’s iTunes Stores from competing with its own integrated services and products. However, its rivals’ success with the device and a declining subscription rate forced the company to finally adopt the iPhone in late 2013.

Valuation

DoComo boasts a great balance sheet with a net cash position. The firm is increasing its shareholders’ returns, as shown by its share buyback rate of 0.20 against its peers’ average of -0.20. Further, it has increased its dividend at a rate of 3.0 on a three-year-basis, compared to the industry average of 1.60.

NTT DoCoMo’s stocks trade at 12.40 its trailing earnings, a discount price compared to its peers’ average of 16.80. Partly offsetting this advantage, its return on equity is lower than the median, with a 9.13% against its rivals’ average of 12.39%.

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All in all, I agree with investment guru Joel Greenblatt (Trades, Portfolio)’s recent incorporation of DoCoMo to his portfolio, since it is my belief that its well-supported leadership will continue to drive the firm on the growth trajectory.

Disclosure: Vanina Egea holds no position in any stocks mentioned.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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