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Roaming the Wireless Frontier
09/22/2009 12:01 am EST
Canada's Rogers and Japan's NTT DoCoMo are driving the data surge transforming telecoms, writes Allan Nichols in Morningstar StockInvestor.
Since the stock market bottomed on March 9th, most sectors have had big runs: The Bank of New York Mellon ADR Index [is] up nearly 70% since then. However, one area that has clearly underperformed is telephone stocks. We think the market is missing the boat here.
Many wireless firms are divisions within an integrated phone company, and as the firms’ growth rates have slowed, growth investors have left for greener pastures. Meanwhile, value investors haven’t necessarily taken up the slack. To entice shareholders, operators are raising their dividends. The industry as a whole is now yielding its highest amount ever, with Europe particularly paying juicy dividends.
This has happened [as] firms have been paying down debt, so most of the yields aren’t dependent on a highly leveraged balance sheet.
A big factor with wireless firms is the climate of the country in which they operate. First, the fewer operators in a country that own their own network, generally the less competitive the market. Second, the lower the penetration rate, the greater the up side for subscriber growth. Finally, the more benign the regulatory environment, the better for investors.
As we look at these categories, certain countries stand out as exemplary, including Canada, France, and Japan. Within these three countries our favorite stocks are Rogers Communications (NYSE: RCI, TSX: RCI-A), France Telecom (NYSE: FTE, Paris: FTE), and NTT DoCoMo (NYSE: DCM; Tokyo: 9437).
Rogers is the largest wireless operator in Canada; it is also the largest cable television operator in Canada and owns other assets, including television and radio stations, magazines, the Toronto Blue Jays, and Rogers Centre (formerly the SkyDome). Due to these other unique assets, it trades at a premium to a straight phone company.
However, it also has strengths within its wireless business. It is the only wireless firm to use GSM technology, which is the most common standard in the world. This means when visitors come to Canada, they will likely use Rogers’ network if they use their cell phones. Roaming revenues are very lucrative. In addition, the iPhone is only designed to run on a GSM network, so by default Rogers is the exclusive supplier of the iPhone in Canada. The firm also has the highest [profit margins] in the country.
DoCoMo is the largest wireless operator in Japan with over 50% market share. It has been a technological leader in the industry. DoCoMo was one of the first operators in the world to offer 3G services and now has 95% of its subscribers on 3G. Its 3G subscribers on average spend about 60% more than 2G customers. We expect it will also be a leader in rolling out LTE, the next generation of service beginning next year, which should further enhance [profitability.]
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