Today's your last chance to buy this bargain share

By Associate Editor David Stevenson Mar 19, 2010

David Stevenson

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Earlier this week I wrote about how barking mad the dotcom bubble became. Worthless companies were bid up to valuation levels that could never be justified.

But it wasn't just rubbish that got over-hyped. Plenty of good quality businesses in technology-type areas saw their shares soar too. Then they got caught up in the bust as things turned sour.

The company I want to look at today was once a major blue-chip superstar. But then it began making losses. And over the last ten years it's plunged by almost 90%.

But now it's on the comeback trail – and looks well worth another look...

British telecoms company Cable & Wireless (LSE: CW/), the first UK phone firm to offer an alternative to BT, was once a very hot stock indeed. In early-March 2000, C&W's shares reached the dizzy heights of 1,500p, up from 200p over the previous decade. The market cap neared £45bn.

To be fair, C&W was making very good money. But the firm's fortunes soon fast reversed. Massive losses in 2002 and 2003 saw the stock price plunge. At one point the shares were changing hands at under 50p each.

Since then, the group's got back on track and into profit. The shares have recovered to today's 147p, though the market cap is now under £4bn. So far, so what, you might be thinking.

Why Cable & Wireless is a buy

But here's where it gets interesting. On Monday the group splits into two. For every share you now hold in Cable & Wireless Plc, you'll get one share in Cable & Wireless Communications (CWC) and one in Cable & Wireless Worldwide (CWW).

CWC is a global telecoms company (telco). It operates in 38 local markets – and it's the no.1 player in most – via four regional hubs in Panama, the Caribbean, Macau and Monaco & Islands. It offers fixed line, broadband, mobile and entertainment services. So far, CWC has generated the cash needed to fund the C&W group.

CWW provides communications services to the corporate market, mainly in the UK, Asia and the Middle East. The recession has been tough, and has eaten up cash – but that's changing. CWW will generate a positive cash flow this year. In other words, it can now stand on its own two feet.

That's the first reason I like the idea of buying C&W today.

Here's the second. The group has already said the overall dividend for the year to end-March 2010 will be 9.5p.

That's a very nice 6.5% yield. I'd be happy enough with that. But after the de-merger, both companies will be free to set their own dividends.

CWC will now report in US dollars. It's already declared a dividend of 8 cents a share for 2010/11. At the current £1/$1.525 exchange rate, that works out at 5.25p. But if the pound drops, those dollar divis will be worth more in sterling terms.

Third, as Tom Gidley-Kitchen at Charles Stanley points out, "investors will see each company as more of a pure play", meaning "the parts will be valued at more than the whole".

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Charles Stanley has crunched the numbers, and sees CWC being worth between 74p and 96p, and CWW between 76p and 92p. That gives a combined value of between 150p and 188p. Even at the lower end of that range, you'd be making a small profit, as well as collecting the yield.

Fourth, the de-merger increases the chance of takeover bids for the two. "Many demergers lead to one or both businesses being bought", says Andrew Parker in the FT. "CWW might be attractive to the bigger players in the corporate telecoms market, such as France Telecom, AT&T or Verizon Communications". Any prospect of a bid is in for free.

And the downsides look limited

Of course, there are risks. Service providers are subject to heavy competition. But C&W shares have underperformed for so long, I reckon that's well and truly 'priced in' by now.

Another concern is that, while the larger of the two de-merged shares would stay in the FTSE 100 index, the smaller could drop out. So 'pure' FTSE 100 index tracker funds wouldn't be able to hold it. But as Paul Howard of JP Morgan points out, the smaller stock would stay in the FTSE 350 index, and "only a limited number of funds solely track the FTSE 100 as opposed to the FTSE 350".

So the downside looks limited. And the market is only just starting to cotton on. Until this month, investors have shown little interest in the de-merger. But that's just starting to change.

C&W's downtrend has been broken

The latest chart is below. I suspect my colleague Dominic Frisby might get quite excited about it. He's keen on technical analysis (for more on this, take a look at his piece on the subject in this week's magazine: Currencies: how to turn yourself into a chartist. If you're not already a subscriber, claim your first three issues free here).

As Dominic says, "of all forms of chart analysis, the simplest and the best is the straight line. It can help you identify trends and channels".

And as you can see from the straight lines on the Cable & Wireless chart below, a clear channel has formed. Technical types might talk here about an 'upside breakout from a downward-sloping wedge'. I'll content myself with pointing out that a 2½ year downtrend has been broken.


Source: Bloomberg

In other words, after a long period of taking a distinct dislike to Cable & Wireless, investors are changing their minds. They've decided this is a share – about to become two shares – that could be back on the winning trail again.

This time round C&W looks a much better value bet than ten years ago. And don't forget that your last chance to buy it is today.

Our recommended article for today

Why Japan really is the trade of the decade

Japan's slump has lasted for two decades. But that's good for stock-pickers, says Merryn Somerset Webb. It means there are plenty of bargains to be had.

Comments (12)

Published in Tips & advice | More articles by David Stevenson

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  • 1. O. Williams

    (19 March 2010, 01:30PM)  Complain about this comment

    I've tried to calculate the Altman Z Score for C&W.
    The data entered appears to provide a Z Score of -0.02 or if the negative liabilities figure is entered as a positive in the creditguru.com calculator, a score of 2.07.
    Whilst I realise that sometimes Z Scores are low without any cause for concern, e.g. historically for banks and this is not the only indicator of a company's health, I'm wondering if I’m using the wrong figures?
    The data are taken from the 2008 Annual Report in the Investor Relations area of the cw.com web site, summarised below (assumed to be the correct extracts):
    1. EBIT (only EBITDA shown): £605m
    2. Total Assets: £4,159m
    3. Net Sales ("Revenue"): £3,152m
    4. Market Value of Equity ("market cap"): £3,974m
    5. Total Liabilities: £228m
    6. Current Assets: £1,572m
    7. Current Liabilities: £1,559m
    8. Retained Earnings: - £634m
    Can anyone confirm if they are finding the same Z Score or if I have entered erroneous data here?
    Many thanks
    O. Williams

  • 2. JGH

    (19 March 2010, 02:32PM)  Complain about this comment

    The website ADVFN shows Altman-Z scores for some companies. Unfortunately this is not shown for the CW's LSE listing (http://www.advfn.com/p.php?pid=financials&cb=1269008880&symbol=LSE%3ACW.) but it does show a score of 1.91 for its NYSE listing (http://www.advfn.com/p.php?pid=financials&cb=1269008787&symbol=NYSE%3ACWP). Don't know whether that makes much difference.

    Hope it helps.
    John

  • 3. Bob Roberts

    (19 March 2010, 02:52PM)  Complain about this comment

    With all respect David, why wasn't this article posted a week ago or longer? Even yesterday would have been useful.

    You know, when someone tells you to buy something and then tells you that you must buy it now, within hours - even within minutes, it is usually because there is a hidden catch. It is the sort of high pressure sales techniques that flim flam people, timeshares sales people, etc, etc, do. If you do not rush into handing over your cash now then you will lose the deal of the century... and often you only end up losing your cash.

    Not meaning to have a go but just politely pointing out that this particular article should have been posted some time ago - unless the board of C&W only decided to split the company this morning?

  • 4. Roger theLodger

    (19 March 2010, 03:03PM)  Complain about this comment

    Couldn't agree more Bob

  • 5. Tony Akram

    (19 March 2010, 03:48PM)  Complain about this comment

    I agree with Bob would have been useful to have the " must buy" information a lot sooner.

    Tony

  • 6. JGH

    (19 March 2010, 04:09PM)  Complain about this comment

    I agree with the comments of Bob and others.

    Depending on how you draw your trend lines either the price broke above the downtrend line yesterday (if you use intraday highs to draw the trend line) or on Tuesday (if you use the days' closing prices to define the trend). To be constructive, perhaps the article could have been published earlier this week with the caveat that the trend line will be broken if the price breaks above 147.5 (or closes above 145).

    To underline the point further, my ISA shares account is offering me a number of free trades if I top it up, but not until the day after doing so. If I had known of the need to buy shares by today, I could have added money to my account yesterday. I accept that paying one commission charge does not alter the case for buying the shares, but it would still have been preferable to buy a few extra shares or save the equivalent of 5 weeks of MoneyWeek magazine's cover price.

    John

  • 7. Pete D

    (19 March 2010, 04:12PM)  Complain about this comment

    Gents is July '09 not enough warning for you?

    http://www.moneyweek.com/investment-advice/share-tip-of-the-week-internet-boom-will-benefit-telecoms-giant-44319.aspx

    Furthermore Z-Scores are notoriously innacurate in the tech sector, you'd be better off reading tarot cards.

  • 8. Orlando

    (19 March 2010, 05:18PM)  Complain about this comment

    at&t, vodafone, telefonica, etc are a mafias that controlled the telecomunications and send the high cost to the consumers

  • 9. Jeff

    (19 March 2010, 07:26PM)  Complain about this comment

    I'm reading the article for the first time at 19:26 on Friday evening. "Last chance "gone.

  • 10. Dark Frat Boy

    (19 March 2010, 10:58PM)  Complain about this comment

    Just read this, so I guess I missed the boat :-)

    Actually, none of this is new. The demerger has been the product of a very protracted process, and has been discussed in countless articles (pretty much all saying exactly the same as this one - Paul Hill commented on the stock, Shares discussed it several times, and I guess IC probably churned out the same story for their magazine). I suspect the reality is that analysts and fund managers are simply unimpressed with the growth prospects of the company (either as one entity or as two independent entities).

    That said, it may be that the one side of the business will perform as a new stock on the basis of its independent appeal to managers (I'm guessing CWC, on the basis of its cashflow, and the possibility of a debt-financed public-private deal, rather than particular growth prospects), and that managers would simply prefer to cherry pick the better half without being stuck with its ugly brother.

    Just a thought.

    DFB

  • 11. new trader

    (29 March 2010, 11:02PM)  Complain about this comment

    I have bought these shares - my first trade. Now what to do with
    them. I was unable to put a stop loss on them and was told that I must just watch and sell at a stop loss price. Such a rooky I possibly should not be trading. Any help would be appreciated.

  • 12. Ru

    (15 November 2011, 11:29AM)  Complain about this comment

    Just did a search on the MoneyWeek website to see if there was any update to this tip, following the dismal performance of both de-merged share prices, but only found this article. If anyone at MoneyWeek is reading, I understand you may prefer to let this one quietly slip away, but it would be nice to hear something for any of us who are wondering whether topping up is likely to be stupidly catching a falling knife or sensibly averaging down (the difference between which, I believe, is only discernible with hindsight).

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