Wednesday, June 4, 2014

Orange Been Squeezed

About a year ago, Orange (ORAN) was brought up on this site as a potential value investment. (Back then, we knew it as France Telecom (FTE).) Sentiment was in the toilet. A weak European economy combined with new regulations and an upstart competitor scared investors away, resulting in price to free cash flow ratios in the single digits.

But these are exactly the conditions under which investors should be buying. When temporary issues (and there were a trifecta here!) affect a historically profitable business in an industry with barriers to entry, it can create a buying opportunity if investors are running scared. That appears to have been what happened here. The regulatory issues eased up as did the competitive environment, and shares of Orange have risen 60% to what I would consider a more appropriate valuation.

Some of the comments I received when I wrote the article last year include:

"FTE will end, but I think it has more than enough strength to limp on for another decade at least, dragging on yield hungry investors that don't know any better."

"Lets not look at the horrible French economy"

"worsening unemployment"

"government that loves to socialize, ruin their private businesses"

"It's been in decline year after year after year."

Such macro-economic, backward-looking forecasts have no place in value investing! Go against the crowd.

Disclosure: No position


Anonymous said...

6224252Any thoughts on SPLS since it is at a near 52 week low?

Saj Karsan said...

Hi Jimmy,

I think it's a good deal at this price myself.