The Motley Fool: Is British Telecom a good call?

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n our research for the Motley Fool Rule Shaker portfolio, we seek out companies dominant in their fields (otherwise known as Rule Makers in Foolish terms).

We have recently turned our attention to the telecommunications industry. We are particularly keen to find British and European Rule Makers, and this is one field not dominated by the US.

The vast bulk of telecommunications traffic is carried by the land- based trunk networks operated by such stalwarts as BT and Cable & Wireless.

The other side of the market is the advance in mobile telecommunications. With the next generation of mobile computing and communications devices just around the corner, the need for mobile data transmission cannot be ignored.

On this score, we have decided to look at both the fixed-line business and the mobile communications business, with the thought of possibly buying shares in one company from each sector for the Rule Shaker portfolio. And who else should we start with other than good old BT? Does it make the grade?

Regular readers will recall that there are four categories to a Rule Maker analysis. Brand Identity comes first, and is made up of familiarity, openness, optimism, legitimacy, inevitability, solitariness and humour.

BT certainly scores on the familiarity front. Who in this country hasn't heard of it? As for openness, what we are looking for is access to all customers, rather than any kind of closed high-value market, and BT scores on this one too.

What about optimism? Does BT appear any more optimistic than its rivals? We don't think so. Next comes legitimacy; all telecommunications services score here, no matter who is supplying them. Inevitability? Yes, certainly. Hardly anyone can get through life these days without a phone.

BT doesn't score on the solitariness front as there are so many competitors in the mobile and cable communications markets. Finally comes humour. Does BT's brand make you smile more than the Orange orang- utan? It doesn't make us smile. The score on this section is therefore four out of seven.

Next up comes Financial Location, which looks at a company's current financial position. Each of the seven criteria carries two points, and we give BT a score of 9 out of a possible 14. BT scores a maximum 2 in the repeat purchase stakes, as its service is bought every time a customer makes a call.

Another 2 points are scored thanks to BT's net margin of 16.4 per cent, and a further 2 for the company's management of its short-term cash flow (as measured by the Foolish Flow ratio, which compares the flow of cash in from short-term debtors and out to short-term creditors). On the subjective criterion of familiarity and interest, BT scores another 2 points, as most Fools here use and are happy with the service.

A single point is scored for a gross margin of 48.3 per cent, but no points are scored on sales growth (it has fallen), or the cash-to-debt situation (far too much debt for Foolish approval).

The third category, Financial Direction, looks at the same criteria again, but in terms of how things are going from one year to the next. If they are getting better, the company gets a higher score. There is a maximum of 3 points in each of six categories, and we give BT a score of only 8 out 18. The company's margins and cash flow are not moving in an altogether favourable Foolish direction.

The final category measures Monopoly Status. We need to compare BT with the closest competitor we can find - we chose Cable & Wireless. Comparing margins, cash-to-debt ratios, and cash flows (that old Foolish Flow ratio again), BT comes out firmly on top, scoring 16 out of a possible 20.

There is an extra point to be had if we like the company, in a purely subjective way - and we do. So that gives BT a total score of 38 out of 60. That doesnot make it an automatic choice by a long way, but we'll be keeping it on the back burner as we look at the mobile communications market in the future.

Our Foolish analysis in no way constitutes a recommendation to buy or sell a share. For that, you must make up your own minds. As always, readers are invited to offer their opinions over at the Motley Fool website www.fool.co.uk on our Rule Shaker message board.

ASK THE FOOL

I'm interested in the LSE's new technology index, which I could follow via a unit trust. However, my risk-loving side says I should split my investment between two tech stocks and hold. My cautious side suggests I invest in an established tech sector unit trust, and wait for TechMark to get known.

GH, London

The Fool replies: What proportion of your money to invest in technology companies, and how many you split it over, is a question that only you can answer. We would suggest caution when considering unit trusts, as more than 90 per cent fail to match the relevant stock market index. If you want to follow the TechMark index, look for a low cost index tracker.

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