The Investment Column: Don't hang up on telecoms

AFTER HITTING an all-time high in early July telecoms stocks, in the words of one City brokerage, "are taking a hammering."

Is this is an early warning signal to sell and book the considerable profits rung up over the past two years. Or is it an invitation for those who have missed the boom the first time round to buy in anticipation of an autumn rally?

To answer that question it is useful to recall a basic fact about the place of telecoms stocks in the London market. Lacking a broad-based British technology sector, domestic and US investors looking abroad have seized on telecoms shares - particularly mobile phone and cable issues - as most closely approximating Nasdaq's big cap technology stocks.

Technology (and telecoms) differ from other sectors in several ways - revenue growth is strong despite the fact that unit prices, whether for bandwidth or micro-processors, have fallen, and will do so for the foreseeable future.

In the current benign interest-rate environment, telecoms stocks have delivered - and continue to offer - strong growth. The mobile phone boom, which shows evidence of accelerating, can be seen in cities and towns up and down the country.

Less well appreciated is the 25 per cent year-on-year revenue growth being rung up by the UK cable sector. This is despite the fact that the two remaining companies, Telewest and NTL, are only beginning to move from their network construction phase to marketing an integrated package of phone, television and Internet services.

Even a lumbering giant like BT is producing revenue growth which, just two years ago, would have been dismissed as wildly optimistic.

Although mobile and fixed line/cable revenues are expanding handsomely, their growth rate pales beside the so-called alternative service providers such as Energis and Colt Telecom.

By offering relatively large amounts of bandwidth to corporate customers (and on occasion to other carriers), these companies capitalise immediately on the relentless doubling in data volumes that occurs every three months.

Evidence of the impact of ever-expanding Internet use on revenues is also provided by British Telecom, which has benefited mightily in recent quarters from a combination of booming online use and (relatively) high per minute charges.

If growth is one reason to buy telecoms stocks, merger and acquisition activity is another. The recent takeover of CWC's residential assets by NTL and Deutsche Telekom's buyout of One2One are part of a much broader international trend.

Until now, however, US telecoms giants such as MCI WorldCom, AT&T and Bell Atlantic have been involved in the post-1996 Telecommunications Act restructuring of the American phone market. Backed by buoyant stock prices to use as acquisition currency, they and others, such as cable and entertainment giant Time Warner, will intensify their focus on global expansion.

The advanced liberalisation of the British market is likely to prove highly attractive as a bridgehead to expand into Europe. Colt and Energis are the most obvious bid targets - assuming that Telewest, at some not too far off date, is integrated with NTL (which could then be a bid target itself).

That still leaves Orange and Cable & Wireless, which despite their pounds 10bn- plus price tags, could easily be swallowed up by any of the leading US firms, not to mention Japan's NTT, or one of the big national European carriers.

That leaves British Telecom and Vodafone AirTouch. Although both may be too big to feature as takeover prey, each offers the benefit of global scale in an industry that is rapidly becoming borderless.

Both companies have substantial opportunities for capital growth in the decade ahead, although management execution in a complicated worldwide market will be the most important factor in realising long-term success.