Investing.com -- Bernstein has reshuffled ratings for the European telecom companies, upgrading Telenor ASA (OL:TEL) to Market Perform (from Underperform) while downgrading Orange SA (EPA:ORAN) to Market Perform (from Outperform).
These revisions are part of a broader reassessment of the sector, which the firm describes as grappling with structural challenges despite recent outperformance.
Telenor’s upgrade follows a “bottom-up review” prompted by changes in coverage responsibilities.
“Telenor is set to benefit from a change to Norwegian regional fibre regulation, relieving Telenor of wholesale access obligations in some regions while enforcing wholesale access obligations on local altnets that Telenor will be able to use,” Bernstein analysts led by Ottavio Adorisio said in a note.
Conversely, Orange faces a downgrade due to “rising price pressures in France and the Netherlands and structural changes to cablecos’ business models.” Alongside Orange, ratings for Koninklijke KPN NV (AS:KPN) and Liberty Global (NASDAQ:LBTYA) were also slashed.
Speaking more broadly, Bernstein’s outlook for the European telecom sector reflects skepticism. Despite outperforming the broader market in 2024, the sector’s performance masked deeper vulnerabilities.
The investment firm notes that much of the index's gains were driven by companies like Millicom International Cellular SA (NASDAQ:TIGO), Nokia (HE:NOKIA), and Ericsson (BS:ERICAs), which either lack significant exposure to European telecom services or benefit from dynamics outside the region.
Bernstein warns of a "time bomb" in pricing, particularly in the mobile segment, where backbook pricing for existing customers remains significantly higher than frontbook pricing for new customers.
“Customers’ inertia may delay the detonation of this time bomb, but it exposes the vulnerability of an optimistic consensus (which projects uninterrupted growth),” analysts said.
Deutsche Telekom (OTC:DTEGY) remains Bernstein’s top sector pick, with a price target raised to €38. The firm also recommends exposure to Cellnex Telecom SA (BME:CLNX) and Swisscom (SIX:SCMN), citing favorable fundamentals. On the other hand, Bernstein urges investors to avoid exposure to Vodafone (NASDAQ:VOD) and Telia (ST:TELIA), citing the companies’ ongoing structural issues.
The analysts also reflected on the M&A activity in the sector, describing the current focus on in-market consolidation as “risky,” given the political and regulatory hurdles involved. The firm remains skeptical of significant regulatory changes in favor of consolidation, despite industry lobbying efforts.