AT&T Calling
Rare and Expensive
Get a Job, Chinese Edition
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If you own a cellular phone and live in the U.S., you may have thought you felt the earth move under your feet last Monday. You were right. The announcement that AT&T plans to acquire T-Mobile USA in a $39 billion cash-and-stock deal was a major earthquake in the world of U.S. mobile phone users.
Or, at least it will be if the deal is approved by Federal regulators.
This proposed merger of the second-largest wireless carrier in the U.S. (AT&T) and the fourth-largest (T-Mobile) would vault AT&T to the top spot, leaving the previous leader (Verizon) in the dust.
Even though AT&T is paying well over the book value for T-Mobile USA (which is a subsidiary of Deutsche Telekom), the resulting company would enjoy improved cellular coverage throughout the U.S. And since AT&T’s more than 95 million subscribers and T-Mobile’s nearly 34 million all use the same GSM technology platform, the augmented AT&T would be nicely set up for the advent of 4G, the next generation of cellular service. (T-Mobile has no 4G and AT&T has been lagging Verizon in this arena.)
Approval of this deal is no slam-dunk. Market commentators, economists and competitors have been raising alarms about what the deal would mean to U.S. consumers. And they may have a point.
If AT&T becomes #1, the logical step would be for Verizon—which has already begun to sell 4G devices—to gobble up Sprint Nextel, which is now the third largest of the four national service providers.
So, instead of a competitive landscape with four competitors throwing elbows and trying to attract subscribers with better service and (possibly) lower rates, there would be just two.
Personally, I’d say it’s about a 50-50 chance that the deal will go through.
Cell phones are getting to be an indispensable part of life for many Americans, and bills for cellular service—which includes instant messaging, and the truckloads of data in instant messages, pictures, voice mails, videos, songs and movies—are taking a big bite out of budgets, especially when combined with cable TV and Internet service.
And if there’s anyone out there who believes that AT&T’s increased market share and reduced competition will result in lower charges for cellular service down the road, I have some bad news for you.
When institutional stock analysts look at stocks like AT&T, which has a market cap of over $165 billion and brought in nearly $125 billion in 2010, one of the things they look for is a factor called “pricing power.”
Pricing power includes items like barriers to entry, intellectual capital and brand loyalty. But the biggest chunk of pricing power is a factor of the number and strength of competitors who will put pressure on everyone in an industry to keep quality high and prices under control. Less competition = more pricing power = a company’s ability to charge more for goods and services.
In terms of national competition, while there are some regional and local providers (like Cricket, MetroPCS and others), four competitors isn’t a lot. That’s what happens when you have to have a national network just to get in the game.
But the prospect of just two major competitors is pitiful.
AT&T’s stock (symbol: T) took a jump from just under 28 at its close on Friday, March 18, to an open near 29 on March 21. Since then, the market has reined in this foolish exuberance, and T is trading right back at 28.
I don’t own any AT&T stock (boring!), but I am an AT&T customer, so I have some skin in this game.
So personally, I’m pulling for Federal regulators to knock this deal in the head. It looks to me like the chances of consumers coming out ahead in this deal are somewhere between slim and none.
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As the editor of Cabot China & Emerging Markets Report, I keep a very close eye on what’s happening in the Middle Kingdom. So I can follow the Chinese government’s attempts to guide their economic and social juggernaut toward prosperity while maintaining stability and protecting both the environment and their own jobs.
Inflation has been the big story for the past couple of weeks, as China’s February Producer Price Index (PPI) rose 7.2%, which was the biggest jump since October 2008.
I’ve written before about the delicate balancing act of keeping the growth of China in the sweet spot, high enough to keep employment high and fortunes growing, but not so high that inflation (and the housing bubble) get out of control.
But what really fascinated me this week was a new wrinkle in the rare earths story.
Rare earths are metals like lanthanum, neodymium and samarium (totaling 17 in all) that have strange powers. Neodymium and samarium produce super-strong magnets and others are vital for high-tech lasers, exotic alloys and batteries.
The upsurge of interest in rare earths is a reflection of the realization of just how scarce they are and how vital to defense technologies and upcoming electric car batteries.
So what’s the problem? We should just get more, right?
The problem is that China has a virtual monopoly on the world’s supply, and the people running China have decided to reduce exports and raise prices. It’s always nice to have a strategic reserve, and capitalists learn the law of supply and demand at their mother’s knee.
A year ago, a ton of rare earths could be had for less than $15,000. In February of this year, that number was just shy of $110,000.
But to me, the really interesting aspect of this dustup is that while China is reducing its exports of rare earths, it has changed the way it reports its exports to make it look like exports are actually increasing.
Previously, only exports of pure rare earths were reported. But by including the tonnage of products that were made with rare earths, the Chinese administration can claim that exports are actually increasing.
It’s a standard trick of governments and companies all over the world. If there are some numbers causing trouble, you change the way you report them.
Geologists and miners around the world are ramping up exploration and recovery efforts at high speed. Molycorp (MCP) in California is closest to actual new production, and the company can probably count on getting all the government support it needs to get U.S. rare earth independence established.
Supply and demand … what a concept!
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Supply and demand is very much what 51job (JOBS), the Chinese employment and human resources services company is all about.
When 51job was founded in the 1990s, finding a job (or an employee, for that matter) meant checking the listings in a weekly employment newspaper. The company excelled at getting employment news out and still publishes millions of paper copies of its recruitment newsletter every week in the 16 Chinese cities it covers.
But the real action now is at 51job.com, the company’s website. The site has over 45 million registered members and a database of 36 million résumés. (It’s definitely worth a click to see the company’s Chinese-language website, which is a starburst of flashing, competing posts that vie for attention.) Online recruitment is now solidly ahead of print as the leading source of revenue.
The big story on 51job is the company’s recovery from the two-year global economic slowdown of the Great Recession. While it remained profitable, never booking a quarter with a loss, revenue fell by 4% in 2009. By contrast, the company rebounded big starting in Q4 2009, the first of three consecutive quarters with triple-digit earnings growth. Revenue growth hit a solid 36% in 2010 with a pretax margin of 31.3%. Analysts are looking for revenue growth to hit 40% in 2011.
Margins are expected to remain high as the company moves into value-added services like executive searches, training, software, salary services and business process outsourcing. Elimination of high-overhead paper publication in some cities will also help.
51job has been through the fire and has come out stronger and more committed to the Web and to providing more profitable services.
JOBS has been trading under resistance at 60 since the middle of January, and the March pullback even pulled it below its previous support at 55. But during the last few days, the stock has caught an updraft and has broken though 60, although volume has not been above average.
This is a solid story with deep roots in the Chinese economy, and I’ll be watching it closely to see if it belongs in the Cabot China & Emerging Markets Report.
To learn more about top emerging markets stocks like JOBS, check out Cabot China & Emerging Markets Report, which Hulbert Financial Digest rated the #1 newsletter for five-year performance in 2009 and 2010.
Sincerely,
Paul Goodwin
For Cabot Wealth Advisory
