Telecom - Foreign Industry

By: Steve Rubis

Industry: Telecommunications – Foreign
Number of Companies: 30
Market Capitalization for Companies in Universe: $572.4B
Market Capitalization for all Foreign Telecoms: $681B

The Telecommunications – Foreign Industry trades at fair value, due in large part to brisk M&A activity during the past year. Despite numerous deals, there seems to be a few undervalued take out targets. In our opinion, there are numerous factors which should help unlock the value of the undervalued securities in this industry.

Catalysts / Problems Facing the Telecom – Foreign Industry:

1.) Mergers and Acquisitions Activity: Morningstar.com provides an enlightening outlook for the Telecom - Foreign Industry. These companies generate significant cash flow, despite large debt positions. Secondly, due to government regulations and margin pressures, M&A provides the best access to growth.
Article: Morningstar Outlook on Foreign Telecom

2.) Telecom Italia Bids: AT&T and Mexican firm America Movil offered 2.82 Euros per share for the parent holding company of Telecom Italia. This price sparked a bidding war, as France Telecom recently expressed interest in the telecom as well.
Article: Telecom Italia Bid

3.) China's Infrastucture: Siemens and Nokia believe that sales growth will double and continue to be strong in the future. It seems that due to the 2008 Olympics in Beijing, that China needs to upgrade much of its infrastructure. The recent runs in China Netcom and China Telecom Group validate this theory.
Article: Siemens and Nokia's Outlook on China

4.) Geo-Political Risks: investing in any foreign entities often involves geo-political risk. Many of the undervalued Foreign Telecoms are located in South America: Brazil and Venezuela. Venezuela’s Hugo Chavez is prone to nationalization of any valuable industry, hence share prices are depressed.

5.) Speculative / Unfavorable Capitalization Structures: a major draw back to the Telecom – Foreign Industry is its capital intensive nature. The majority of the stocks in this industry have large debt burdens, which is cause for alarm.

The chart below reviews the metrics which characterize the Telecom – Foreign Industry as a whole.

Table 1: Telecommunications – Foreign Industry Metrics Compared to the NASDAQ



The metrics above are in-line with the overall market and reflect the numerous M&A deals over the past year. Numerous stocks within the industry have shown significant price appreciation due to M&A activities.

Furthermore, the Price to EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) and Enterprise Value to EBITDA ratios suggest that M&A activity will continue. These ratios are quite low in comparison to most industries. Secondly, these stocks offer a strong Return on Equity as well as a decent Return on Assets. Problems occur for investors who rely on Discounted Cash Flow valuations because of an exorbitant Price to Free Cash Flow ratio. Lastly, the industry does not offer much safety in terms of the Fed Model. Earnings Yields are not significantly above the current Risk Free Rate.

Table 2: Telecommunications – Foreign Industry Average Per Share Values



The per share values above confirm our thesis that the industry trades at fair value. A roughly 11% discount is hardly cause for celebration. Nevertheless, there are a few stocks which seem quite attractive because of the catalysts identified at the beginning of the article. Here is the list:

Undervalued:
1.) Brasil Telecom Participacoes (BRP)
2.) China Netcom Group (CN)
3.) KT Corp ADS (KTC)
4.) Nippon Telephone and Telegraph (NTT)
5.) Telenor ASA (TELN)
6.) Tele Norte Lest (TNE)
7.) Compania Anom Venezuela (VNT)

Moderately Undervalued:
1.) France Telecom (FTE)
2.) British Telecom (BT)
3.) China Telecom Corp. (CHA)
The companies on the undervalued list, with the exception of VNT, seem poised for further growth. Despite large capitalizations, each one seems to have good prospects for the future.

*Note: we did not use the Altman Z Score discussion in the article. At the time of writing, we encountered difficulty compiling the data. This was due to currency conversions and stale data.
**Note: the author of this article cannot be held responsible for any monies gained or lost based on this presentation. This presentation identifies certain stocks to be attractive based on data from Yahoo!Finance. Further due diligence is needed before purchasing any stock mentioned.