Day Trading & Forex Forum

It was once one of the darlings of the FTSE, but over the past year the telecommunications sector has had a rough ride. So is it out of woods yet, or is there worse to come?

Changes in the telecom sector since the turn of the century have made the telcos a markedly different investment proposition since the high flying days of the tech boom. At the height of the bubble incredibly optimistic industry growth projections propelled the share prices to record heights. Inevitably the bubble burst, and in the aftermath investors shunned the sector.

"..the telecommunications sector has undergone something of a transformation over the past decade. "

However, today company balance sheets are stronger, prospective earnings multiples are generally in the low to mid teens, and surplus cash is flowing back to shareholders via increased dividends and share buybacks. Established participants are also executing strategies to combat the threats to growth caused by market saturation, increasing competition, and new technologies.

With over 185 million customers, Vodafone (VOD) is the global heavyweight, and a prime example of how the industry landscape has changed. The days of mega-acquisitions look to be over, with management adopting a more measured approach to growth.

Indeed the company is even shedding underperforming and non-core businesses. Vodafone Japan, a source of angst in recent years, was sold to Softbank for £9.8 billion in April. The disposal was welcome, coming as it did hot on the heels of the company's £28 billion impairment write-down. The potential disposal of the company's stake in Verizon Wireless in America would also provide a significant cash injection and shore up investor sentiment even further.

Growth in developed markets is a hot issue for mobile phone companies operating in saturated regions such as the US, UK and continental Europe. The challenge is to find replacement growth in emerging markets and through unsaturated technologies. With respect to the former, Vodafone is targeting places like South Africa, Turkey, and India. Whilst from a technology perspective, Vodafone is betting on 3G.

Considering the practical implications of restoring former growth path glories, it is somewhat surprising how impatient investors have become. For instance, Arun Sarin, CEO of Vodafone, returned from this week's annual general meeting after facing down calls from some shareholders for new leadership. No doubt the next 12 months will see a renewed sense of urgency on his part. While we do not expect a transformation over night, we do believe that in Vodafone's case the building blocks for growth are in place.

BT Group (BT.A), the world's sixth largest telco by market cap, is also in the Fat Prophets Portfolio. BT underwent a radical restructuring following the end of the technology bull market as well. After ringing these changes BT became a much leaner operator, and has been able to effectively address the significant threats posed by increased fixed line competition, mobiles, and voice over internet protocol. Today the company announced that first quarter 'New wave' sales rose 18 percent to £1.6 billion - these now account for more than a third of turnover.

Increasing competition is in BT's case proving to be a double-edged sword. In the past the company's monopolistic position, particularly in the UK, has been a millstone around its neck, with regulatory intervention a fact of life. However respite has arrived - the British regulator scrapped 22 years of price controls last week.