The Market Reaction

Telstra has opened at 395c, down another 7c this morning. It lifted its trading halt early yesterday afternoon instead of waiting until this morning. The stock fell 30c or 7% to 402c in the afternoon. Not a great reaction to their seven-hour presentation after four months of preparation.

The headline this morning could be "Telstra reveals bold new strategy" or "Telstra profit warning". Take your pick. Here are some of the comments this morning having dealt with the detail yesterday:

• Watch out for stop losses. The word has gone about that there are massive stop loss orders ready to trigger if Telstra goes under 400c today '¦ in other words, if it crosses 400c it will, at least in the short term, drop harder.

• Forecasts rubbery. Telstra emphasising that all plans rely on a "reasonable" regulatory environment. "This is what we can do, given the chance". In other words, the forecasts they made yesterday, unsexy as they are, depend on a change in regulatory environment and are therefore still rubbery. The comment from Communications Minister Helen Coonan this morning might help: "I think in the end we have to accept that the Government doesn't run Telstra", implying that it did under Ziggy Switkowski.

• Ambitious plan. The transformation of Telstra is being described as the most ambitious corporate restructure ever undertaken in the world. "If we pull it off," says Solomon Trujillo. In other words, a lot of what were heard yesterday was hope not reality. You can't rely on the targets.

• Dreaming. Solomon Trujillo's wish list of doubling revenue of Sensis (taking on Google?!) and having 35–30% of revenues from new products is as fanciful as my daughter putting down "Rabbit" on her Christmas list.

• Telstra sale won't happen. If the Government is looking for 525c to 560c for its Telstra stake, then T3 is not going to happen anytime in the next few years, no matter how they re-jig the numbers. The public just won't be interested. Helen Coonan was on the ABC this morning, saying: "What we'll do is have a look at it early next year and decide how to proceed". Meanwhile, the Government stake sits as a big overhang on share price performance. The likelihood is that the stake will now find its way into the Government's Future Fund and while there will remain a burden on the share price. The Future Fund doesn't want 75% of its assets in one stock. It will be a seller.

• Broker dilemma. Some brokers have a bit of a dilemma: do they give away any hopes of a fee from selling Telstra 3 and speak their minds, or do they retain their HOLD recommendations and hedge their bets on upsetting the corporate department's ambitions. A lot of brokers have given up the hope of fees.

• CSFB retains an OUTPERFORM recommendation. Merrill Lynch has a SELL. Goldman Sachs JB Were have cut from MARKET PERFORM to UNDER PERFORM. UBS Warburg retains a NEUTRAL recommendation. Macquarie downgrades to UNDERPERFORM. Citibank Smith Barney Stays with a HOLD.

• Broker downgrades. Broker earnings numbers this morning include: A 13% downgrade for the next three years from Goldman Sachs JB Were. UBS Warburg have left their numbers unchanged for the moment. Citibank Smith Barney have downgraded by 23%, 22% and 21%. CSFB have left forecasts unchanged.

• Broker valuations. Broker valuations seen this morning include: Goldman Sachs JB Were at 460c. UBS Warburg 450c. Macquarie at 375c. Citibank Smith Barney expect it to trade in the range 360c to 400c. Have a 375c target. CSFB has a 478c target price.

• Broker comments. Goldman Sachs JB Were says the plan is "ambitious, necessary, courageous, expensive, enormously risky, returns dilutive". They say it will be 12 months before the market gives them the benefit of the doubt on delivery. UBS Warburg say this is a "trust us we'll get it right" story and that the profit downgrade from the company was because of changes in one off items not operational EBIT and that if Telstra achieve their goals the 2010 free cash flow is 35% above their forecast. Aspect Huntley say it is "hardly a growth story" and with a 7% yield at 400c Telstra becomes a yield stock. The carrot is $6–7 billion of free cash flow in 2010 if all goes to plan.

Macquarie says: "The cost of transforming Telstra into a lean, innovative, customer focused and state of the art communications company is far greater than we (or the market) had anticipated". They say forecast are "possible, probably not probable". Reasonable regulatory outcomes are not likely. Citibank Smith Barney sees a favorable regulatory outcome as highly unlikely. CSFB says: "Despite the continuing uncertainty in the regulatory environment, our analysis suggests that significant operational cost savings are achievable for Telstra. We view that this will be the key earnings driver in the near term".

• Christmas party. The sale of T3 and the associated broker fees can no longer be relied upon. The corporate departments of most major brokers will this morning take a leaf out of Sol Trujillo's book and cancel the French champagne and caviar ordered for the Christmas party. Staff contributions for a beer and skittles night look more appropriate (probably still manage a few bottles of domestic bubbly '” it was a good year for deals).

• Not a growth stock. Telstra officially lost all chance of regaining any sort of "growth" premium in its share price with the forecasts yesterday. Ambitious as the plan is, the net result, 3.0% to 3.5% compound growth, is not worth waiting for.

• Not an income stock. If the only reason to hold Telstra is as an income stock then the comment has to be that you could do better elsewhere. It is still going to pay a 6c special dividend in March but there will be no other specials or buybacks and there is no guarantee of anything more than a 28c dividend for the next three years. After that there is complete uncertainty. It is even losing its shine as an income stock.

• Pain without the gain. This comment in the morning meeting this morning seems to sum up yesterday's presentation and the future for Telstra shareholders.

• Watch out for the rest. If Telstra is really going to drive its broadband market share from 41% to 60% in the next two years then they are going to putting the squeeze on all the other companies trying to sell broadband packages over their network (or another network). Not good for Optus (SingTel - SGT). This business is going to become very competitive and some of Telstra's competitors will struggle to survive.

• Invest in the rest. Telstra is planning $10 billion of capex between now and 2010 yet it is reducing staff numbers by 20%. The point being, it is going to spend a lot of money and some companies will boom because of it. Haven't done it yet but you ought to be thinking about companies that do work for Telstra.

• Hype over job cuts. A fuss is being made in the media about the announced 10,000–12,000 jobs that will be cut from Telstra over the next five years. It was not a good day to announce it: the national day of action of proposed industrial relations changes.

• Credit rating. There is talk of Telstra's credit rating being downgraded on the back of yesterday's presentation.

All in all the question is this: Do you trust Telstra? The answer from the majority of clients and colleagues this morning appears to be that we have all lost enough money doing that and there are better places to get a decent yield, which is about all that's certain about Telstra, and even that only has a three-year guarantee.