Finance Theory, US Economy

OMG! Big Telecom Returns

By, 03/15/2007

Editor's Note: Today's commentary is written in half English, half Texting language. If you want to know what any of this means, check the legend at the bottom of this commentary. And for more, learn a whole new language at the Collins Texting Word Dictionary: http://www.collins.co.uk/wordexchange/Sections/TextingWords.aspx?pg=113

OMG! Telecom stocks have been some of the best performers over the last year. The returns have investors SETE.

Keep in mind TINAR for telecoms in general—the industry still faces many problems. Most regions of the world are saturated with cell phones and their growth rates are anemic. Plus, landline counts are shrinking as more people move to VoIP (voice over internet protocol), cable for broadband, or just use their cells as the primary line. Additionally, there's tremendously fierce price competition and slim margins to sell handsets and keep customers on their service plans in spite of all the time we waste TKING and TXTIN. HHOJ!

To boot, most of the big telecoms are taking on fairly scary levels of debt in order to build out giant new fiber optic infrastructures and wireless towers…investments they may not see a great return on in the future. :-(

So, how did the telecoms do it? Mergers! TMOT, most telecoms have customers and tangible assets that are very similar—meaning they can easily create synergies between each other if they merge. When the financial environment is right, consolidation is a natural for telecoms. When companies are purchased, they're generally bought for a nice premium, and the buying company sees its earnings instantly grow. Both send share prices up.

You may be asking yourself, HWISTKT? Well, our regular readers know we've been touting Mergermania and a highly attractive consolidation environment for quite a while. Today, many companies can borrow at a rate cheaper than the cost of buying the earnings of their rivals. Doing so automatically adds their own profits. (See our past commentaries: "If CEOs Don't, Investors Will Do it For Them" and "Mergermania!")

Despite media worries, which spew incredible amounts of MIPS, SCNR, the industry was probably far too segmented and in need of consolidation anyway. :-)

But watch out, with all this consolidation the government could have a TSOHF and start regulating. However, it seems unlikely we'll see a big anti-trust hullabaloo like we did with AT&T decades ago. If more regulation happened, we'd be SUFID.

The telecom sector is a powerful reminder that low borrowing costs and high earnings yields can create a torrent of equity supply destruction that drives stocks up despite the challenges the industry faces. It's just simple finance.

Ok, well, we've GTG now, TGTF! TTYS!

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Texting Legend:
- OMG! (oh my god!)
- SETE (smiling ear to ear)
- TINAR (this is not a recommendation)
- TKING (talking)
- TXTIN (texting)
- HHOJ (ha ha only joking)
- TMOT (Trust me on this)
- HWISTKT? (How was I supposed to know that?)
- MIPS (meaningless information per second)
- SCNR (Sorry, could not resist)
- TSOHF (total sense of humor failure)
- SUFID (screwing up face in disgust)
- GTG (got to go)
- TGTF (Thank god tomorrow's Friday)
- TTYS (Talk to you soon)

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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