Mults Expand at France Telecom

We remain buyers of France Telecom (FTE - Analyst Report) ADRs. Improved free cash flow visibility over the next six months, combined with an attractive and safe dividend yield suggest that price momentum may continue, driving the stock to new highs.

We now expect some earnings growth even for 2008, but the main investment thesis for FTE is P/E multiple expansion, which is now dramatically taking place. We believe investors aggressively de-rated FTE's P/E multiple in 2005-2006 due to limited cash flow visibility, but we view those fears as overdone and expect the stock to make new highs going forward.

France Telecom is trading at 13.0x our revised 2008 earnings per ADR estimate, which is a discount to the average telecom operator. We believe the discount should narrow, given France Telecom's dominant position in the French telecom market (both fixed and wireless), and the potential for dividend increases although to a lesser extent now.

We expect the stock to get back to its positive momentum, largely due to the impact of cost cutting and rapidly improving results internationally and in France. We revise down our target to $40.00 to reflect rising market risk premiums.

Read the full analyst report on FTE

Read the full analyst report on FTE