On Sep 18, 2013, we downgraded our recommendation on
) to Underperform from Neutral rating due to its subdued
performance during the first half of 2013.
Why the Downgrade?
Decelerating mobile service revenues in France and lower
Enterprise segment revenues resulted in annualised decline in the
top and the bottom line. Stiff competition, regulatory concerns
and wireless switch also remain detrimental to the company's
performance. The Paris-based company currently carries a Zacks
Rank #5 (Strong Sell).
Cutthroat competition within the French telecom market is
forcing Orange to reduce its average revenue per user (ARPU).
Rollout of attractive 3G plans by broadband service provider,
Iliad SA has resulted in continued revenue erosion. In an attempt
to remain competitive, the company slashed its service rates.
Orange expects ARPU to decrease around 12% in 2013 and in turn
impact its performance.
Regulatory issues in certain European markets remain concerns
for the company. Reduction in mobile termination rates in key
markets such as the U.K. and Spain continues to impact the
company's revenues from these markets. Additionally, in Belgium,
mobile tariffs have been decreased by the fixed line carriers to
bring in new customers while triple play rates in the country are
one of the highest in Europe. This is impacting the competitive
balance in the country.
The ongoing wireless substitution trend has affected Orange's
fixed line telephone business as the company continues to face
access line losses. To compensate for access line loss the
company is jointly implementing the FTTH (Fiber to the Home)
network in Spain with
Vodafone Group Plc.
) at a cost of around $ 3 billion. This can, however, constrain
Orange's balance sheet.
Slowdown in economic growth in the emerging markets could hurt
the company's expected return on investment, minimizing
shareholder rewards. Additionally, the company recently issued
$1.95 billion (€1.5 billion) worth of debt, which could enhance
its leverage position and affect margins. Based on these risks,
we have a negative stance on the company.
Other stocks that are worth mentioning within the same sector
Cellcom Israel Ltd
). CEL currently has a Zacks Rank #1 (Strong Buy) while TEF
carries a Zacks Rank #2 (Buy).
CELLCOM ISRAEL (CEL): Free Stock Analysis
ORANGE-ADR (ORAN): Free Stock Analysis Report
TELEFONICA S.A. (TEF): Free Stock Analysis
VODAFONE GP PLC (VOD): Free Stock Analysis
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