Eircom's share price is a fair one

Many of the half-million private investors in the newly privatised Eircom must be scratching their heads as to why Eircom shares appear to be now totally friendless in the stock market.

The good summer of 1999 has barely ended and all of the hype that surrounded the issue of the shares looks more and more like a lot of hot air and little substance.

The vast army of private novice investors has received a sharp lesson on the realities of large public issues. In such issues virtually all of the key players have a vested interest in achieving a successful sale of some or all of the relevant company.

In Telecom Eireann's (now Eircom) case there was an unprecedented marketing campaign by the Government and its advisers designed to generate a new source of demand for the shares from the Irish public. The majority of the large Irish financial institutions were lined up to sell the shares and stood to land handsome fees from a successful float at a high price.

In the same way that a good car salesman extols the virtues of his product, all of the highly paid advisers extolled the virtues of Eircom. The Irish economy was growing rapidly, the rate of corporation tax was declining, and Eircom could eventually be a takeover target.

Once the sale was successfully completed, the same advisers seem to have awoken to the reality of intensified competition in the telecommunications' market and the risk that the Irish economy may slow down.

The shares are now below their issue price and the table shows some valuation comparisons with its continental European peers.

At the time of flotation, Eircom was launched at a premium valuation to its peers and at its peak price it was trading at a very substantial premium. The data in the table shows that the recent decline in its share price has brought the valuation of the company much closer to European norms. Eircom's price/earnings ratio is now similar to that of KPN and France Telecom.

The favoured measure of value of telecom stocks amongst professional analysts is Enterprise Value (EV) divided by a measure of gross earnings, commonly referred to as EV/EBIDTA. This is a more inclusive measure of value than the P/E ratio although it generally produces a similar result in terms of relative rankings. On this measure, it can be seen that the rating afforded to Eircom is still a little higher than its peers even at the current share price.

The above analysis suggests that holders of Eircom shares should probably hold for the long term, as the shares now seem to be fairly priced. But for potential new investors the issue boils down to a view on whether Eircom deserves to be valued more highly than its European counterparts.

Those investors, who take the view that rapid Irish economic growth and lower tax rates are sufficient to offset intensified competition, will probably view the current spate of weakness in the share price as a buying opportunity.

However, most of these investors probably received enough shares in the IPO and therefore it will take aggressive buying from the Irish institutions to push the share price back up.

For the moment they seem to be content to sit and wait for what may be an even better buying opportunity if conditions in the stock market remain uncertain.