Unlocking global value

GLOBAL INVESTOR 2.07 Switching — 46
better monitor the usage of their networks thanks to the new
architectur e. This could put them in a position to charge a kind of
“Internet toll” for better bandwidth quality. They are also likely to
have learned their lesson from past developments with their wireline
networks and be ready and prepared to better defend their territory
in the mobile Internet business. Moreover it will be easier for them
to develop new services.
Winners and losers of the network revolution
This year’s 3GSM World Congress in Barcelona left the impression
that telecom companies are more pragmatic and that they are committed
to increasing traffic through their networks but also to benefiting
financially from those traffic flows. They might succeed in
doing so if they correctly develop and market their new “one-sizefits-all
network.” We consider BT Group, KPN, Verizon and NTT the
pioneers in this field. Deutsche Telekom and France Télécom have
some catch-up potential because they have relatively strong IT operations.
Losers are likely to be the alternative carriers or telecom companies
that are only active in their domestic market. In this subsegment,
further market consolidation and merger and acquisition
(M&A) activity are likely. Telecom equipment suppliers should continue
to benefit, too, as more money will have to be spent on building
and upgrading landline and wireless networks. With its strong
market position in the Internet protocol television (IPTV) business,
Alcatel-Lucent is the company with the best market growth prospects
among the European manufacturers. Moreover, the surging
growth of data traffic volumes is accompanied by sustained demand
for optical network elements and edge routers, a business where
Alcatel-Lucent is also well positioned, along with Ciena, Cisco and
the smaller European company Adva Optical. In the IT services sector,
companies such as Amdocs stand to benefit, since they already have
experience in integrating IT services into telecom networks.
Table 1
Companies benefiting from the network revolution
Telecom companies are more pragmatic and committed to increasing traffic through their networks. Telecom equipment suppliers and IT service
companies should benefit from additional demand and funds spent on networks. Source: Credit Suisse
Stock Bloomberg Sec. no. Rating Investment thesis
BT Group BT/A LN 1292393 HOLD BT Group operates one of the most advanced next generation networks
among incumbents.
Koninklijke KPN KPN NA 1076509 HOLD KPN’s all IP strategy should lead to a successful turnaround of its domestic
wireline business.
Verizon Comm VZ US 1095642 HOLD Verizon’s FiOS (fiber optic services) project is a promising value driver
for the company.
Nippon Tel&Tel 9432 JP 764057 HOLD Japan’s leading telecom operator with monopoly power in fiber optic
network services.
Deutsche Telekom DTE GR 1026592 HOLD Restructuring and new VDSL initiative in its domestic broadband business
should lead to a turnaround.
France Télécom FTE FP 720128 HOLD FT provides one of the highest FCF and dividend yields among the European
telecom stocks.
Alcatel-Lucent CGE FP 485864 BUY Alcatel should benefit from its leading position in the IPTV-equipment
marke t and from merger synergies.
Ciena CIEN US 2721615 BUY New products and management leverage Ciena’s position in the recovering
optics market.
Cisco CSCO US 918546 BUY Leadership within key network infrastructure segments qualifies Cisco
as a main beneficiary of the content digitization trend.
Amdocs DOX US 922906 BUY Rolls-Royce in the growing telecom/Internet billing and mediation systems
market.
IBM IBM US 941800 HOLD IBM continues to benefit from its solid product/service lineup as well
as from continued restructuring.
Capgemini CAP FP 488070 BUY Successful restructuring and new business opportunities through all-IP
networ ks.
Adva Optical ADV GR 498244 BUY Niche player with strong growth in the recovering optics market.
Google GOOG US 1916494 BUY Leader in the Internet’s evolution to a more dynamic communications and
media tool.
Yahoo YHOO US 453745 BUY Yahoo’s next generation search technology (Panama) should fuel
continued growth.
The above recommendations represent our mid- to longer-term investment view at the time of writing and are subject to change depending on market conditions.
Please contact your relationship manager for regular updates on specific companies.