Brexit Fears Unfairly Hit European Communication Stocks

Fears of the impact of Britain's exit from the European Union have pushed down the prices of most European communication stocks. We think this is an overreaction as we view telecom as a sector somewhat immune to geopolitical changes.

In our view, Brexit will have no effect on cross-border transfers of voice or data as mobile termination rates for voice have already been reduced to negligible levels and for data have been cut in half and will be down to local roaming rates by the end of 2017.

While we expect the U.K. economy will slow as a result of Brexit, we don't believe the event will have a material impact on the U.K. operators. We maintain moat ratings for our entire European telecom coverage universe. For now, we also maintain our fair value estimates in local currencies, but may be lowering them for the ADRs depending on currency moves versus the dollar. The exception is

Within the U.K., we think

The acquisitions of Sky Deutschland and Sky Italia looks more prescient as

) now has a decent amount of euro-denominated revenue to bring back into the weaker pound to offset subscriber losses. Sky’s customer base held up better than we expected during the financial crisis, and while premium television services are more discretionary, we think its losses will be minimal and offset by currency gains.

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