We remain buyers of France Telecom SA ADRs (FTE). Improved free cash flow visibility over the next six months combined with an attractive and safe dividend yield suggest that price momentum may continue, driving the stock to new highs.

France Telecom is trading at 12.5x our revised 2008 earnings per ADR estimate, which is a discount to the average telecom operator. We believe the discount should narrow, given France Telecom's dominant position in the French telecom market (both fixed and wireless), and the potential for dividend increases although to a lesser extent now.

We expect the stock to get back to its positive momentum, largely due to the impact of cost cutting and rapidly improving results internationally and in France. We revise down our target to $40.00 to reflect rising market risk premiums. When looking at its closest peers, Deutsche Telekom AG (DT) and Telefonica S.A. (TEF), FTE still undervalued.

We do not think this valuation gap is sustainable although it has recently narrowed due to the good performance to date of Deutsche Telekom- ADR. We believe FTE can still rally up to year end where we will get the final clue towards revenue and cash flow growth.