We are maintaining our long-term Neutral recommendation on
France Telecom S.A
) following first half 2012 earnings results. Despite healthy
performances in Spain and the emerging markets, revenue and profits
in the first half slipped year over year hurt by weak domestic
The company is gradually overcoming last year's challenges on the
back of its benefits from a diversified portfolio and the national
roaming contract signed with Iliad SA, the fourth largest mobile
operator in France.
France Telecom is progressing well on its Conquests 2015 plan that
will reinvigorate growth and restore profitability in the business.
The company, in the midst of the first or adoption phase
(2011-2013) of its five-year plan, is working on various
initiatives to enhance growth in the domestic and international
markets. Further, the company is shedding underperforming European
assets due to weak economic conditions in that region and
unfavorable regulatory measures that continue to restrict its top
Despite the economic uncertainty and competitive pressures, France
Telecom continues to strengthen its balance sheet with net
debt-to-EBITDA ratio target of 2 times over the medium term. The
company also expects to maintain an operating cash flow of €8
billion for the year. In addition, it will provide healthy
dividends to its shareholders by distributing 40-45% of operating
cash flow in the form of dividends in fiscal 2012 and 2013.
However, higher VAT rates, persistently weak domestic economic
conditions, labor concerns, lower mobile termination rates,
unfavorable regulatory measures across its key European markets and
intensifying competition from Bouygues,
Telecom Italia spA
Vodafone Group Plc
) might restrict the upside potential of the stock.
Further, increased investments related to expansion and network
improvements might accelerate the company's cost of operation,
resulting in lower profits going forward.
As a result, France Telecom retains a Zacks #4 (Sell) Rank for the
short term (1-3 months).
TELECOM ITA-ADR (TI): Free Stock Analysis
VODAFONE GP PLC (VOD): Free Stock Analysis
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