2023-08-02 04:21:44 ET
Summary
- Deutsche Telekom has been a successful investment for me.
- The 2Q23 results for Deutsche Telekom are expected to show a 1.5-2% revenue growth and stable profit KPIs.
- The company's growth prospects and potential upside make it an attractive investment, despite its lower yield compared to other telcos.
Dear readers/followers,
Deutsche Telekom ( OTCQX:DTEGY ) (DTEGF) has been one of my few very successful telco investments in the past 2 years, by which it has ripened and materialized into the RoR that I expected from it, enabling me to "SELL" or rotate at a high of €22/share (though it went somewhat higher), only to now look at where I might end up going back "in" to this investment.
DTEGY is one of the few companies that, despite interest rate pressures and the current macro for the telco sector, has held to a relatively high valuation and a relatively low overall yield. This did not play a part in my decision to rotate though.
I believe every investment has a time to shine, and a time to sell/rotate, due to full or overvaluation. Timing this is never easy - nor would I claim, ever, to be able to time this, as things may go higher - but I do believe that I have a good estimate for when companies tend to have reached their highs and there are better investments out there.
I never get attached to any of my investments. To me, it's all just numbers. I do "like" profitable and above-quality companies, but that doesn't stop me from shoving them out of my portfolio when they've reached where I've wanted them to go, or where I believe they'll go.
Since I last covered the company in May, the company has declined significantly in the face of a rising market. Deutsche has dropped over 7% while the market has gone up 9.24%, looking at the S&P500. This, as I see it, is a result of full valuation in a sector that is currently not in favor. This, as I see, warrants a look because at below €20/share for the native, things are far more positive and a double-digit upside is possible here, even on a more conservative basis.
In this article, I'll look at where we could go back in after seeing the 2Q23 results from the company.
Let's take a look.
Updating on Deutsche Telekom after 2Q23.
Deutsche Telekom has been a good investment for me. I have outperformed the market, and been able to earn a respectable yield and safety by investing in one of the largest telecommunication businesses around. I sold at the highs and reinvested this into a mix of businesses, 80% of which have outperformed further.
For 2Q23 for Deutsche Telekom, we have the following trends and results to keep an eye on, as we've already seen the consensus results published.
Even consensus, between high and low and looking at the average forecast, calls for a 1.5-2% revenue growth with manageable churn. The full report will be out in about two weeks - but I thought I would go in here and provide you with an update as to why I believe the company to be a "BUY" below a €20/share native PT. In fact, I was at a relatively high PT in my previous article, which I will explain more - but the fact is that if you want the double-digit return, you'd have to look at a price below the €21/share mark. Above that, your returns may start to skirt 8-9% even normalized at 12x P/E.
The upside for Deutsche Telekom remains very similar going into 2Q as we've seen before. The European operations, which currently are the ones responsible for shareholder dividends, will continue to see stability due to their above-average market positioning in terms of quality. Remember, you still have the TMUS growth story here - once this materializes in full and if we start to see dividends, it's not unlikely that we're looking at 5-6% yield from this Telco, which makes for an even more compelling ownership thesis than we have now.
Profit KPIs were stable in 1Q23, and I expect them to be stable going forward as well, because beyond interest rates - which we have good visibility before due to debt, there isn't much change here.
We saw a 4.4% increase in core EBITDA, and I expect another 2-3% YoY increase in the coming quarter, with TMUS continuing to contribute to these increases.
All of the other positives are still very much intact. The company is leading in 5G and its FTTH is still very much on track. DTEGY is on track to deliver 2.5M more homes in the EU with FFTH of 1Gbps in 2023E alone, and new partnerships are already being signed - with 10 mn households with 1Gbps for 2024 , with a coverage ratio of 32%.
TMUSA meanwhile, is a market leader in network performance and delivers 5G network coverage for 98% of all Americans. Even EX-TMUSA, the company is very solid, but TMUSA is a definite argument here.
Customer growth was stable, especially in fixed/broadband/TV adds. Non-US is growing faster than US postpaid adds, where there is still a bit of churn - and expecting this to continue into 2Q23 is probably a good idea. The company's updated guidance for 2023E is still relevant here, and the current guidance is for a lower EPS for the year, but at a level of around €1.6/share. Analysts expect between €1.58 to around €1.7, which would come to around an 8-9% YoY decline from an extremely strong overall 2022.
I don't expect the company to be close to the 2022A results, but I do expect around €1.58 to €1.65, which is why my target I significantly below where others are currently forecasting the company.
A conservative approach is the best for Deutsche Telekom. The reason it's outperforming in the context of other Telcos, which are currently significantly below in terms of P/E, is that the TMUS story and the company's growth profile actually contain a fair bit of potential upside beyond the typical single-digit per year.
Beyond the 2023 results, expectations are for Deutsche Telekom to grow by double digits. I see no issue in this, as the TMUS stake matures. However, the big drawback to the company here is that we're at a significant sector low in terms of dividend yield. The company is BBB+ rated but yields no more than 3.5%. That's a bit of a problem where any of the other European or American Telcos give you twice that - and they're not exactly bad in the quality department either.
So I'm a bit torn here, as to say, to invest in Verizon ( VZ ) or investing in Deutsche Telekom. I'm not a "cigar-butt investor" but calling Verizon a cigar-butt investment would be ridiculous. It's not. At this time I would probably tend towards Verizon above DT - but say that you're already full on Verizon?
At that time, this becomes a very interesting potential for sure. The company has things that you may be looking for. My issue is that the next few quarters will likely prepare us for a lower EPS - and no matter how much we knew that going in, it's always still different what the share price "does" with this. In this context, I expect there might be further downside as the next few quarters come in. This doesn't faze me, as the stock is likely to climb, but it's still something to be aware of.
Let's look at the valuation and see what we have going for us here.
Deutsche Telekom - It's not the cheapest, but it's one of the clearest growth prospects out there.
Many investors are saying that they don't want to invest in companies with sub-par growth profiles. Well, here you have a company that's actually going to grow impressively over the next few years - I have a high conviction that this is the case.
You only need to accept, at this time, that you're going to be getting a significantly lower yield for your money in the interim unless the TMUS addition to the dividend comes earlier than expected.
Current forecasts put DTE at around 10% for 2024 and 12% for 2025E. These forecasts come with very high accuracies. Less than 10% miss ratio on a negative basis with a 20% margin of error. Not a single negative miss for almost 10 years, as things stand right now. Plenty to like about that.
At €19.9/share, I'd estimate your conservative upside to be capped at about 15.7% annually over the next few years. This is not a poor investment in the least, but it comes with an above-average risk given you're going in in a declining trend.
Deutsche Telekom Upside (F.A.S.T graphs)
At least, it's above average if you invest for the short term. If you have a longer timeframe, ignore that - I believe the stock will stabilize over time. DTE has a market cap of close to €100B and is one of the largest providers of digital infrastructure in all of Europe. Nothing earth-shattering, as I believe it, will happen to it.
But I believe analysts are a bit too positive on the outlook here.
S&P Global analysts give the company a PT of €19.5 on the low side to €35/share, with an average of €26/share as a long-term target. Out of 21 analysts following the company, 12 analysts are at a "BUY". I would consider such a target relevant for the long-term, implying 12-13x P/E, and with TMUS included, I have no issue with this target.
The problem is that's not where we are - and there are many, many opportunities out there for us that have upsides that look equally good, or better, or equally good but with a better yield.
For that reason, I'm still going "BUY" here - and I may buy more if the company drops to below €19.5, but at 15% annually in upside, there are such good alternatives in the telco space, that I would view this as "one among many potentials".
I checked cash-secured Puts and buy-writes with covered calls to see if we can get an annualized upside that beats this 15%, but with a safer risk/reward profile, but this is not possible. Put premiums have been declining, and even longer-dated ones yield no more than 8-9% with any sort of conservative PT. Buy-writes are possible, but cap at around 11% for any sort of price that I would consider conservative enough.
For that reason, the common share investments are the way to go here - but I would caution you to look at alternate investments. Even if VZ was only to go up to a 9.27x P/E, that's still a higher upside than we can see in DTE at this particular time - and there are many similarities to this investment and DTE.
I'll provide you with an update beyond this for 2Q23 if necessary in 2 weeks - but, I see DTE as a good enough potential to go into - 15% makes it such - but there are many other good alternatives on the market today.
Thesis
- Deutsche Telekom is one of the more qualitative and price/mix-appealing telco businesses on earth. While it does have somewhat higher leverage and lower credit rating and yield than some of its peers, it makes up for this with a potential longer-term upside and growth that is outside the 1-2% norm found in the sector.
- I believe Deutsche Telekom can be bought with ease and as a "STRONG BUY" at anything involving a €1X native share price.
- When the native share price reaches above €21/share, things look somewhat different. It's still a "BUY", and I put the PT around €24/share long-term, but at over €21/share, your returns are looking likely to include single-digit RoR.
- I'm still at a "BUY" for the company. I may buy back some shares here.
Remember, I'm all about:
1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them ( italicized ).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
Deutsche Telekom is no longer cheap - but it's decent enough with a good upside, and I maintain my "BUY" here.
For further details see:
Deutsche Telekom: Good Profit-Taking At €22, But It's A 'Buy' At €19.9