France Telecom SA ADRFTE

FT should continue to generate significant free cash flow each year for the next five years, which can be used to pay down debt and further increase the dividend, which has increased to EUR 1.4 per share from 0.48 four years ago.

The firm is leading the way in convergence between fixed-line and wireless telephony and the Internet.

Orange is the market share leader in France and well positioned in the U.K. It also has significant growth opportunities in Poland and other countries. Since 2007 it has entered five new African countries.

The enterprise communication services business showed some growth, providing hope that the bottom for large corporate clients is near.

We think Poland's government is making the correct decisions, which is helping it distinguish itself from many of its Eastern European brethren. We think it will likely recover faster than its neighbors helping FT's Polish division get back on track. Read more 

Lowering revenue expectations 3 times in 2005 and 2006 hurt management's credibility. The bungled attempt to acquire TeliaSonera in 2008 didn't help, though walking away was better than overpaying. Also, in 2007 the European Union charged the firm EUR 798 million for receiving improper tax benefits from the state, and this could go higher with penalties and interest.

The firm still has a large amount of debt at almost EUR 37 billion, a burden that would be exacerbated by a large acquisition.

French unions are very strong, making cost-cutting layoffs difficult. FT is in an especially difficult situation, as about two thirds of the firm's employees are civil servants. This is being exacerbated by bad press after 25 employees committed suicide over the past 20 months.

More of FT's growth is coming from emerging markets, which entail greater risks than Western Europe.

FT is still 26.7% owned by the French government. The government has a significant influence on strategy and may have objectives that are different from other shareholders'. Read more