Not Much Excitement Around Deutsche Telekom (DT)

by: SA Editors posted on: April 05, 2006 | about stocks: DT

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The Wall Street Journal (sub. required) asks if Deutsche Telekom AG (DT) is attractive at current prices; the analysis doesn't give any warm and fuzzy feelings. Key points:

Share Price: DT shares have dropped 10% over the last year on the background of general telco weakness in Europe and falling revenues from fixed-line services. Its dividend yield, therefore, is 5% higher than peers Vodafone (VOD) and Telefonica (TEF)
Enterprise Value/EBITDA: EV is 5.4X EBITDA, compared with 5.8X for European telcos (Goldman Sachs estimates). Juan Carlos Acitores from Spanish firm Ahorro Corporación Financiera SV has higher earnings estimates for DT resulting in a 4.8 EV/EBITDA multiple, one of the lowest in global telecom.

P/E: DT is currently trading at 12X expected 2006 earnings, slightly higher than competitors' P/E. According to Acitores, who has a 'strong buy' recommendation on DT, "The stock is significantly undervalued."
Falling Operating Earnings: Thomson Financial reports that earnings per share are projected by analysts to be €1.14 in 2006 and €1.21 in 2007 (2005 earnings were €1.31 per share). Analysts expect Vodafone and AT&T, on the other hand, to grow earnings by more than 9% in 2006 and 2007.
Falling Revenues: DT's domestic revenue-the source of more than half total revenue-dropped 1.6% in 2005. Wireless prices are expected to fall up to 20% this year, and the company has lost substantial market share in DSL (from 83% in 2004 to 62% in 2005).
Tough Restructuring: DT slashed net debt from €74 billion in mid-2001 to €38.6 billion. The current restructuring plan calls for eliminating 32,000 jobs over three years at a cost of €3.3 billion. And according to the WSJ, "some analysts say that even the 32,000 job cuts wouldn't be enough to get operations sufficiently lean."
T-Mobile USA: With a 27% increase in revenue last year, DT's US mobile offering provides a glimmer of light. However T-Mobile's ARPU has been declining faster than rivals', and churn has been a bigger issue as well. "Because T-Mobile doesn't have the same amount of spectrum as its competitors, it can't offer expensive third-generation services to its customers. The unit will have to spend several billion dollars in the next couple of years to upgrade its network."