Forum Archive Index - June 2001

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Peter, 

For every seller there is a buyer, as that's how a market works.

So following Phaedrus's rather gloomy chart, and your own comments 
here is my more fundamentalist argument as to why you should hold or 
even buy Telstra.

First the reason for the share price slump in the last fortnight.  
Telstra's profits are not increasing as fast as expected.  Consider 
that statement carefully.  This years profits are still going to be 
greater than last years.  The rising EPS trend has not been broken.
And profit margins are at record levels.

Sitting here in NZ it is probably hard to get a handle on just how 
large and powerful Telstra is.   There was an excellent article in 
the Australian BRW dated June 8th,, titled :  "Dial T for tyrant'.   
The article opens:

"After four years of full deregulation, Telstra is firmly in charge 
of the industry and accounts for more than 90% of its profits"

Can you name any other company in any deregulated industry in any 
country that is as dominant as that?

If we break down the telecommunications industry in Australia 
further into market shares for Telstra we get:

Local Calls 95% (includes 15% wholesaled through other companies) , 
Toll Calls 70%, Pay Television 52% (through 50% ownership of Foxtel) 
Mobile Services 46%.  ISPs 25%.

Then if we look at one of the areas they are weakest, Mobile 
Services, (although they are still the industry leader on 46% market 
share) where is the competition coming from?   Optus have been more 
focussed on finding a buyer for their company than being on the front 
foot for customer service.  Vodaphone is considering pulling out of 
Australia so they can concentrate on their own problems in Europe, 
and AAPT is cash starved as regards future development due to our own 
Telecom's high debt problems.

Also of note is that, unlike some of the European Telecos, Telstra 
did not overpay for 3G spectrum.

I won't attempt to precis the whole article, but I will quote the 
closing paragraph:

"The next 12 months will be a difficult period for the sector.  
Unless Telstra's dominance is countered things will get worse:  Optus 
will wither as a competitive force, Telecom NZ will become 
effectively irrelevant, Vodaphone will probably sell its majority 
stake in Vodaphone pacific and Telstra will pour its money into Asia 
instead of Australia."

This is not good news for Australia as regards competition.  But it 
is very good for Telstra shareholders.

>
> - one would expect the price to
> fall to at least 560 ( calculated as 740 = -(920 - 740))
>

$NZ5.60 would be a P/E of 12, and a yield of around 5%, or if Telstra 
did a Telecom NZ and decided to pay out all of its profit, a yield of 
10%.

It is possible, but I can't see the price going that low.

> 
> TLS floated at about 320 in Nov 1997 and rapidly went to the first
> peak at 920 odd in Feb 1999. The only pauses on the way up are
> where Phaedrus has highlighted some support levels. The rise was
> dramatic and as such TLS did not form any real foundation. 
>
>

The reason why Telstra rose so steeply is that when it originally 
floated it was way too cheap.  That was a political decision at float 
time.  I can't see how you can say that decision casts a shadow over 
Telstra now.

>
> 
> The best short term prognosis (from the chart point of view) is that
> TLS will form a long term bottoming pattern - one that will
> probably last for some time. The only question is - what will be
> the bottom?
> 
>

The chart shows TLS in a downward trend.   The chart may form a long 
term bottoming pattern as you say Peter.  It may pause and then 
continue to sink.  It may pause and start to climb again.   Reading 
anything more into the chart is just idle speculation IMHO.   

Still, like all situations where there are two opposing views, I 
guess time will tell who is right.   I'm not saying the price won't 
go lower in the next few months.   But 3 years down the track I 
would think potential shareholders would be very well rewarded 
if they bought at these levels.  SNOOPY

disclosure: ( Hold TLS )

---------------------------------
Message sent by Snoopy 
e-mail  tennyson@caverock.net.nz
on Pegasus Mail version 2.55
----------------------------------
"Sometimes to see the wood from the trees, 
you have to cut down all the trees."



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