Deux Chevaux?

I'd long held, from a quick superficial point of view, that France Telecom was cheap. I thought so at 17. And at 14. Even more so at 10. And again at 8. I haven't had a position but have carried the thought nonetheless, and watched with some attention. The reason I've not taken a position is mostly because of my dislike of cratering revenues and earnings forecasts. While the stock has been ahead of the fundamental declines, opportunities have been fleeting, an little has changed to the fundamental scenario, though the stock is, again, in front of fundamentals.  Sumzero now thinks it is cheap too. 7x forecast. Outsized yield. Decelerating deceleration in revenues. Goliath status in local markets. Etc.

But before you back up your deux cheveaux (or park it front-wise since it's a rear-engine relic), it would be wise to consider this. I've been a good customer of Chez Orange for several years. Three analog landlines (inbound, fax, alarm circuit), Unlimited Broadband & Livebox TV, Video-on-demand, along with a digital telephone line (used for outbound), as well as two mobiles numbers with unlimited data, a few hours of talk time, and a heavily discounted foreign forfait. The monthly hit for this was roughly Euro160 plus whatever variable calls to daytime mobiles, foreign mobiles, or restricted regulated countries. My American friends tell me this is a serious bargain. My UK experience, and competitive observations suggested this was the wrong price.

So I ambled down to my local Orange kiosk where, despite the much-discussed low morale of engineers deskilled into clerical roles, I found a friendly salesman willing to tolerate my pidgin-French. I also had my trusty, enthusiastic, and more important, bilingual 10 year-old son. I told the Orange representative: "I think I'm paying too much. Let's negotiate". So we went back and forth. Discussed the various options, plans, and bundles. It turns out, France Telecom is keen to decommission the analog lines. If you can afford them, they ARE more reliable, and useful for fax and alarms, but the incentive to cut them is now simply too great. Mobile competitive pressures are finally being felt too. The result: massive, and I mean MASSIVE reductions.

After much discussion, we agreed: kill the analog lines. Move the permanent analog number to the digital line. Port the alarm to the digital line. Continue with unlimited broadband, Livebox WiFi and VoD, and with this package comes move 1 mobile to the bundle, and add the second mobile to the bundle for Euro 10. Total cost for year one: Euro 56/mo., stepping up to Euro61 when an applied discount rolls off. Wow! From Euro160/mo to Euro 55/mo!! OK, Small cuts to mobile minutes and an unobtrusive throttle on broadband for the mobile phones, and the small inconvenience of no fax line (must scan and e-mail), but these were inconsequential in the scheme of things.

Now, I realize that I am not the typical customer. But the revenue drop is eye-popping, and beyond my wildest imagination. And while one shouldn't extrapolate this throughout their businesses, the impact of similar blended revenue deflation is large and palpable and I am unlikely to be amongst the last customers to make such realizations and take action. France Telecom's debt, by contrast, is relatively fixed. And, for the first time in regards to FTE, firsthand, I witnessed how right the market had been fundamentally,and how little conviction I have that this is "in the price".

The stock IS likely ahead of revenue/earnings declines. And it may bounce. But continued revenue and earnings contraction and disappointments coupled with continued likely paring of the dividend means choppy trading and snuffed rallies before ratings will be view more positively.  That's my FTE anecdote of the day FWIW...