Chris Gent excels, but for how much longer?

Bullish Cohen, Oftel bites back
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The Independent Online

Chris Gent, chief executive of Vodafone, is the pin-up boy of the telecommunications sector. True, his share price has been falling for most of this year, but not by nearly as much as most rivals. In common with everyone else, he's also got massive debt. Fortunately, Mr Gent's debt mountain at £13.2bn is more in the nature of a Mont Blanc than the Everest everyone else is saddled with. Paying paper rather than cash in his dash for growth seems to have served Mr Gent well, and unlike some others, he's sitting pretty for the retrenchment the industry is now having to reconcile itself to. He can afford to pay cash or paper in what may be a fire-sale environment.

Chris Gent, chief executive of Vodafone, is the pin-up boy of the telecommunications sector. True, his share price has been falling for most of this year, but not by nearly as much as most rivals. In common with everyone else, he's also got massive debt. Fortunately, Mr Gent's debt mountain at £13.2bn is more in the nature of a Mont Blanc than the Everest everyone else is saddled with. Paying paper rather than cash in his dash for growth seems to have served Mr Gent well, and unlike some others, he's sitting pretty for the retrenchment the industry is now having to reconcile itself to. He can afford to pay cash or paper in what may be a fire-sale environment.

What's more, Vodafone is, for the time being, still a growth company. Total customer numbers jumped 55 per cent in the six months to the end of September and, with a fair wind through the Christmas period, the company should for the fourth year in succession be able to record 50 per cent plus growth in the year as a whole. The half-year results show margins under considerable pressure, especially in Germany, but this is almost wholly because of the upfront costs of subsidising new customers. Since the half-year end, the price war with T-Mobil has eased a bit, so margins should in any case be on the mend. Up 24 per cent for the half year at £3.28bn, Ebitda was as high as anyone could realistically have hoped for.

Here, then, is one stalwart of the New Economy which has managed not only to avoid disappointing market expectations but has actually succeeded in beating them. Mr Gent was duly rewarded with a near 10 per cent hike in his share price yesterday. What a goodie, goodie.

None the less, Vodafone has a way to go to justify the still heady rating its shares trade on. There's obviously plenty of growth still to come before things slow and Vodafone becomes just another big, boring company like any other. Remarkably, Vodafone is also managing to grow profits at quite a clip alongside sales which, as any company managing growth will tell you, is incredibly hard to do.

But wireless application protocol has so far been a big disappointment and there are growing doubts about the ability of third-generation licences to generate a whole new phase of growth through mobile commerce and the wireless internet. Quite when the market for mobile telephony will mature is still a subject of heated debate, but one thing is certain. At some point Vodafone's growth will slow to pedestrian levels and the company will at that point become valued just like any other well run, mature business with a p/e somewhere in the low 20s and a dividend yield of 4-5 per cent. Is that point three years, five years or 10 years out? Whatever the answer, earnings have got to rise by a lot in the meantime to justify the valuation.

Vodafone is still a growth company, but it may no longer be a growth stock. There's upside left, undoubtedly. In the immediate aftermath of the Mannesmann takeover the shares reached nearly £4 and there's no reason to believe they won't achieve that price again. But the days when Vodafone's share price would double, triple, and then double again, are sadly a thing of the past.

Bullish Cohen

Abby Joseph Cohen, Goldman Sachs's equity strategist, is surely right in thinking the recent market sell-off overdone. To read the newspaper headlines, anyone would think the New Economy was gazing into the abyss. Profit warnings seem to abound, growth rates are slowing, inventories are rising, and fortunes are being destroyed. But as Ms Cohen points out, things are not nearly as bad as they seem. Ms Cohen was talking about the US, but her comments might equally well apply here.

Of course economic and profits growth is slowing from the break-neck pace established last winter, but it remains well above trend. And obviously there have been some high-profile profit warnings, especially from the leaders in the New Economy. Dip behind the headlines, however, and you find that 90 per cent of S&P 500 companies have reported third-quarter figures above average stock market expectations. Profit warnings are also lower than normal. Uncertainty over the US presidential election plainly doesn't help, but this is presumably just a temporary problem. Equities as a whole are looking attractive once more, Ms Cohen concludes.

As ever, the big question is which equities. This year has seen so many swings in sentiment between New and Old Economy, between growth and yield stocks, that it is hardly possible to keep up. Right now, it is mature, defensive stocks which are back in favour. Meanwhile there has been some quite horrendous wealth destruction in the technology, media and telecoms sectors.

The fall from grace among the TMTs is more than just a sentiment-driven thing. In technology, growth has in most cases failed to live up to exaggerated expectations. Now there's a surprise. Among the dot.coms, growth has been hard to find in any quantity, which is less surprising still. In telecoms, there has been rampant over investment, with all its inevitable consequences - too much supply chasing too little demand. So much for the New Economy being immune to the usual laws of economics. But all this, in a sense, is yesterday's story. The bubble has burst and we've had the shakeout. Despite it all, a hard landing looks unlikely. Ms Cohen is right in thinking technology stocks worth buying again.

Oftel bites back

David Edmunds, director-general of Oftel, seems to have been stung into action by suggestions that he is too cosy with British Telecom, judging by his evidence to MPs yesterday. There is nothing worse than accusing someone in Mr Edmunds' position of falling victim to "regulatory capture", but that's just what has been happening. He's more lapdog than watchdog, many have been saying.

Well, every dog has his day and Mr Edmunds was not going to pass up the opportunity of an appearance before the Commons Trade and Industry Select Committee to set the record straight. A bit like stock markets when they are hit by bad news, Mr Edmunds ended up over-correcting. Far from being in BT's pockets, he was engaged in "trench warfare" with the company to force it to open its local exchanges to rival operators.

What BT's competitors mistook for soft-pedalling by the regulator was in fact a "bitter" dialogue with the company to bring high-speed internet access to all. MPs only half-laughed when finally Mr Edmunds half-joked that prison would be suitable place for some BT executives. It's amazing how animated someone can get about a subject as dry as local loop unbundling.

Having bared his teeth at last, the onus is on Mr Edmunds to make sure his bite is felt. The regulator says that he could not have pushed BT harder. But forcing it to open up only a tenth of its local exchanges, and then largely ones in locations that are of least interest to competitors, does not sound like tough action. Energis, for instance, reckons it will be lucky to have its kit installed in a single BT exchange when local loop unbundling is introduced in January. There remains much work to be done.

* outlook@independent.co.uk

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