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Morningstar | Deutsche Telekom Reported Solid 3Q Results, but Better Options in European Telecom Exist

Deutsche Telekom reported solid third-quarter results, but we are maintaining our EUR 17 per local share fair value estimate and no-moat rating. We believe the shares are undervalued, but there are more interesting telecom names in Europe, namely Telefonica, Vodafone, and BT Group.

The firm reported revenue grew 4.7% year over year in the third quarter, but revenue remains slightly negative for the nine-month period versus our full-year projection of a slight revenue gain. The U.S. returned to the revenue driver’s seat, increasing 8% in euro terms as it benefited from currency movements this quarter after having been hurt by them for the past three quarters. For more on the U.S. business please see our previous note on T-Mobile U.S.

The European operations are also performing better, with revenue growing 2.2%. However, part of this is from the acquisition of Liberty Global’s Austrian operations at the end of July. That said, we were pleased with increases in average revenue per user in several countries: Greece, Poland, and Croatia. DT is also having more success with selling converged fixed-line and wireless telephony services. This region now has 2.9 million such customers, an increase of 46% from the year-ago period.

While DT is also making progress in Germany selling converged services, growing 14.1% to 4.1 million, revenue in the country still fell 0.7%. However, we expect the firm’s focus on converged services and fibre-based broadband services will eventually allow revenue growth to return to Germany as well. In the meantime, it is working on controlling costs, and it generated an EBITDA margin of 32.5% in the quarter versus our full-year projection of 30.4%. However, the fourth quarter is historically much lower than the rest of the year, so we expect DT’s full year EBITDA margin to decline toward our estimate.