Why Are Telecoms Shares So Cheap?
Posted by Cloud Net on Fri, Jul 30, 2010 @ 04:33 AM
Telecoms companies in the 1990s used to be regarded as high
flying tech stocks. However, many have been badly run and most destroyed huge amounts of value by overpaying for acquisitions at the height of the dotcom boom. Added to these factors are rising capital expenditure costs, stricter regulation and new technologies such as VoIP destroying margins for traditional telecoms companies.
If that’s not enough new fibre networks represent another drain on company finances since they require heavy investment to ensure that these companies keep hold of their competitive positions.
That is why for example BT is doing all it can to make its cash position look more attractive to investors: from altering billing dates, to altering the cheap period for calls to simply raising prices.
It’s thanks to these billing moves that companies such as Cloud Net, which offer high quality VoIP business phone systems, become more appealing to small businesses looking for straightforward pricing.
Regulation has controlled many aspects of telecoms profits for years and the government can be seen to be improving the situation for consumers by leaning more heavily on the companies. The cuts imposed recently on mobile termination rates are a case in point.
Cable and Wireless recently announced a profit shortfall because of a reduction in government spending. The share price reacted with a 25% fall.
Brokers are regarding telecoms as utility companies sharing their high borrowings with strong cash flows which enable the debts to be serviced. However, regarding them as utilities does mean they are not stocks that need to be held in a portfolio. Indeed as a utility stock their profits are not as guaranteed as say, an electricity company. After all you need light at home you don't need to make that phone call in the same way.
The technology that drives the internet is both a blessing and a curse for the Telco’s. On the one hand the ever increasing demand for data is a positive thing requiring ever more fibre but on the other it does need more capital investment. The charging models are complex and there is a fragmentation of the network with some companies cherry picking parts of the network to develop and sell, which puts pressure on the large incumbents.
The bottom line is will I be investing in BT, Cable and Wireless, Talk Talk or Vodafone in the near future? The answer is that although the stocks are cheap - they are cheap for a reason.
Written by David Hill, Chairman, Cloud Net