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Telecom Giant Keeps Opening Key Doors to Success

April 14, 2014 | About:
Patricio Kehoe

Patricio Kehoe

7 followers

As well as a diversified business, having an extensive footprint in many different regions allows companies to avoid leaving their success subject to the economic and political swings of one country. This compelling strategy has been properly understood and carried out by telecommunications leader Orange ADR (ORAN). Based in France, the company has expanded its services onto 32 other countries, serving a total of 236 million customers. Hence, it has become one of the world’s largest telecommunications carriers and the third largest wireless operator in Europe.

The firm provides local phone, domestic and international long distance, wireless data communications, Internet access, multimedia, broadcast and cable TV services. Its business arm, Orange Business Services, accounts for 15.9% of the company’s sales and is one of the leading providers of communications services to multinational companies.

A Healthy Management

In order to counter the aggressive pricing strategy from wireless new entrant Iliad SA (ILD) in France, Orange was forced to reduce prices. Thus, the firm has continued to add wireless subscribers but at a lower average revenue per user, mainly through its low-end Sosh brand.

Further, its existing contract base keeps rolling into lower priced plans. As a result, the company’s revenue has plunged, in spite of which the firm has managed to improve its bottom line year over year in 2013.

Management’s efficiency is also evidenced by its decision to reduce its non-core assets in order to concentrate on its most profitable businesses. Consequently, almost nine months after its initial tender, Orange divested its Dominican unit to Luxemburg-based Altice SA (ATC) for $1.4 billion last week.

The news boosted its stock price, which climbed 2.31% on the NYSE last Wednesday. This operation provides the company with significant cash volume to reduce its debt burden and invest in Europe and other emerging markets.

Growth Drivers

The company is accelerating infrastructural developments to drive 4G LTE expansion in order to support wireless growth in France and other key regions across Europe. In 2013, it captured 40% of the French population with 4,200 sites and it also reached 0.5 million customers and 30% of its network coverage in Spain. Noteworthily, LTE network expansion will foster long-term growth in the company’s mobile data business.

Apart from its dominant position in France, Orange is also Poland’s incumbent telecom operator. Its leadership in both countries has allowed the firm to spread its costs over a larger customer base and also to benefit from greater power to negotiate pricing when buying equipment.

Furthermore, the company is enjoying substantial growth in Africa and the Middle East, where it boasts 106.1 million wireless users, almost one third of its total customer base. In most of these countries the firm is the first or second operator by number of subscribers, thereby benefiting from the same scale advantages it has in France. Put together, all these operations play a significant role in the company’s economic moat and in its revenue and cash generation.

Valuation

All the aforementioned traits and strategies support a positive outlook on the firm’s prospects and have earned it an Outperform recommendation from Zacks.

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Orange stock trades at 15.50 its trailing earnings, a discount compared to its peers’ average of 16.80. And although its 7.69% return on equity is lower than its competitors’ average of 12.39%, it has been following an upward trend since January 2013.

Its dividend yield and payout ratio are higher, delivering 4.04 and 0.62, respectively, against its competitors’ 3.76 and 0.58. Investment guru Joel Greenblatt (Trades, Portfolio) recently incorporated Orange to its portfolio in accordance with my bullish feeling about the firm’s ability to keep itself on the growth trajectory.

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

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