Merryn's Blog

Britain's austerity drive claims its first blue-chip victim

Cable & Wireless Worldwide has become the first high-profile victim of the government's public-spending squeeze. It won't be the last.

You probably spotted the story on Cable & Wireless's profit shock this week.

The first thing to say is, if you've just bought last week's cover story tip, then don't panic.

Yes, shareholders in telecoms kit supplier Cable & Wireless Worldwide (LSE: CW/) has just received a painful profit warning. However, that's not the stock we backed. C&W Worldwide, you may recall, split from global phone services firm Cable & Wireless Communications (LSE: CWC) earlier this year. And that's doing rather well.

More on that in a minute. But first, what went wrong at C&W Worldwide? Well the group "has just become the first blue-chip victim" of Britain's austerity squeeze, as Nick Clark in The Independent puts it. As the government slashes its outlays, there's already been a "very significant" fall in non-contracted UK public spending (the spending which isn't already covered by long-term contracts), says the firm.

This means that full-year profits at C&W Worldwide will now be "somewhat" lower than expected. Since Tuesday's announcement, its shares have plunged by some 22%.

And as state spending is cut much further, there are bound to be more casualties among firms for whom the UK government has been a big customer. We're on the lookout for other companies likely to catch colds on this front.

But getting back to the rather more attractive Cable & Wireless Communications (memo to the management how about a name change to make matters easier for investors?), the group had a much happier tale to tell in its own trading update this week.

Despite one or two weaker areas, such as the Caribbean, the year has "started well", according to CEO Tony Rice. So no nasty surprises here.

And post-update, the shares are... well, exactly where they were last Friday. That may sound rather boring. But these days, that's not a bad sign. For more on why we like C&W Communications and three more top tips in the telecoms sector, read last week's cover story here. (If you're not already a subscriber, subscribe to MoneyWeek magazine.)

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