Paul Hill picks the worst tip from the week’s press and brokers’ reports. This week: an overvalued company in an intensely competitive market.
Carphone Warehouse (CPW: 315p), tipped by The Daily Telegraph
Carphone Warehouse’s share price has gone from strength to strength over the past three years. During the Iraq war in 2003, shares were around 50p and since then it has risen nearly sevenfold. This is a credit to CEO Charles Dunstone and his management team, who recognised that the future lay in more than simply selling mobile phones. Instead, CPW has created a valuable brand (TalkTalk), which champions the consumer’s fight against perceived higher prices from BT.
CPW’s marketing has just about been flawless. Maureen Lipman (ie, Beattie from the original British Telecom advertisements) was chosen as the face of TalkTalk during its launch, and the company recently generated incredible demand for its new ‘free forever’ broadband service. So much so, in fact, that it has experienced significant problems in connecting all of the 340,000 new customers who were signed up in the first two months. Clearly, the strategy is to lock as many customers as possible into 18-month contracts and to sell them bundled services. CPW already offers broadband internet, mobile and fixed-line telephony. The final piece in the quadruple-play jigsaw is TV, which is currently being explored.
You could well argue, as The Daily Telegraph did last week, that the shares are a buy. Personally, I don’t agree – on the grounds of both valuation and intensifying competition.
At 315p, CPW trades on a whopping 29 times next year’s earnings, falling to 16 in 2008. In my view, this is far too high. Additionally, over the past two years, eight directors have sold significant chunks of stock at prices ranging between 140p and 330p.
This sector is becoming unhealthily competitive. In fact, with so much money being pumped into the launch of bundled services from the likes of Orange, SKY, BT and NTL, it’s likely to end in tears. Indeed, the decline has already started, as the cost of broadband has fallen dramatically. For instance, CPW admits that it will lose £5 per month for each new customer until it can install its own equipment into BT’s telephone exchanges.
Yes, there will be winners and losers, but in my view, the consumer will be the main beneficiary from this dotcom-like dash for growth. None of the main protagonists will remain unscathed by the aggressive price war. Cable and Wireless (with Bulldog), Phones4U and AOL UK have all recognised these dangers and are trying to sell up.
Finally, in the very short term, it is worth noting the damage being caused by the World Cup to the retail sector. Last Saturday, high-street stores had their worst weekend so far this year as shoppers stayed at home to soak up the sunshine and watch the football. Takings at non-food outlets were battered as the combination of hot weather and England’s opening match left some city centres and retail parks almost deserted on Saturday afternoon. That means that CPW shop sales will also be hit during the tournament.
Recommendation: follow the directors’ lead and take profits at 315p
Paul Hill’s personal portfolio has gone up by 483% over the last five years. To find out more about his own specialist share-tipping service, ‘Precision Guided Investments’, click on the link below: