Deutsche Telekom: Nicht So Gut

Sometimes being short of cash in your portfolio can be the best thing that happens to you. Consider the case of Deutsche Telekom (NYSE: DT  ) . I've often scouted this giant German telco with a value slant and considered adding it to my own portfolio. Luckily, I never did, and the stock got smacked today on word that competition is taking a bigger bite than management was previously willing to acknowledge.

Performance in the second quarter was not good. Revenue was up a little less than 3%, as decent growth in the mobile business continues to offset weakness in the fixed line and business communications segments. Adjusted operating profits dropped almost 17%, and net income came in 14% lower than in the year-ago quarter.

Bad as that was, it gets worse. Management cut guidance for both this year and the next, acknowledging that "reality is beginning to catch up with Deutsche Telekom, as it has not effectively adjusted to the changing world of telecoms." Uhh, OK. Maybe I should applaud them for their honesty, but I frankly don't find an "oops, we botched it. Sorry," admission to be tremendously comforting.

In addition to fierce competition in Germany and the rest of Europe, the company's business in the U.S. is far from assured. T-Mobile U.S. has been a rare bright spot, but Deutsche Telekom is facing some steep expenditures on new bandwidth and equipment to keep pace. It's really an ogre's choice (that is, "die fast or die slow") -- if they underspend, they risk getting left behind by Verizon (NYSE: VZ  ) , Sprint Nextel (NYSE: S  ) , and the other big American wireless operators. By the same token, many investors may gag on the multi-billion-dollar price tag that goes with staying in the game.

With everyone, including me, jolted back to reality on the state of European telcos, it's time to survey the damage. To that end, I can still see a value argument for Deutsche Telekom. The company may have been slow to acknowledge and adapt to the new world, but they have the scope and liquidity to survive the mistake. No Fool should expect a speedy turnaround, but I wouldn't hang up on this idea just yet.

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Fool contributorStephen Simpsonhas no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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