Telecom – Foreign’s Undervalued Opportunities

By: Steve Rubis and Louis Entsminger

The Telecom – Foreign Industry offers significant investment opportunities. We feel that there are numerous companies that are undervalued when compared to the rest of the industry. Mergers and acquisitions activity will provide the significant catalyst for unlocking value.

Below, is our competitive analysis of the Telecom – Foreign Industry. The stocks selected for comparison are those listed as undervalued in our Telecom – Foreign Industry analysis article posted on Friday, April 6, 2007.

Table 1: Undervalued Foreign Telecommunication Stocks


The table above illustrates that four stocks exceed our required threshold for margin of safety. Each stock has a margin of safety greater than $20 per share. We think that these companies are attractively priced. These stocks offer significant discounts from fair value at current prices.

Table 2: Telecom – Foreign Industry Stock Universe


The stocks highlighted in green represent the stocks which offer the greatest margin of safety. This spreadsheet serves as the initial filter for our analysis. Stocks that appear undervalued on this sheet are then selected for further research.

The most significant opportunities exist in South America, specifically Brazil and Venezuela, and Asia, which includes China, Japan, and Korea.

Table 3: Comparative Analysis of Take Out Values


Industry metrics for Price to EBITDA and EV to EBITDA suggest that the industry will continue to experience strong M&A activity. The industry as a whole trades at very low ratios, which makes the Telecom – Foreign Industry ripe for consolidation and private equity investors.

Table 4: Comparative Relative Multiple Values


Each opportunity offers investors significant safety in terms of book values. The ratios suggest that the selected stocks are attractive. Table three illustrates that each stock has significant room for price appreciation in terms of price to sales, earnings, and book value.

Table 5: Comparison of Enterprise Values


Table four gives investors a sense of what it will cost to re-create each company from scratch. This provides an interesting signal to mergers and acquisitions and private equity investors. Investors are better off buying shares of these respective firms because their share prices sell for less that what it would cost to re-create each business.

Table 6: Comparative Earnings Power Value and Weighted Average Cost of Capital


Despite large debt positions, each company seemingly enjoys a very low weighted average cost of capital. The respective WACC’s range from 3.56% to 24.54%, which begs the question: are these values reliable? In our estimation, the answer is yes. The reason that these companies enjoy such low WACC values is because of their geographic locations. They have an advantage in that debt is sometimes cheaper in foreign countries, and tax credits generate a greater tax shield benefit. Given that the WACC costs are reasonable, the earnings power values are valid as well.

Table 7: Comparison of Earnings Power Value and Reproduction Value


Four of the selected companies pass our first extreme value test: does earnings power value exceed reproduction value. This provides investors a strong margin of safety, since this shows that the earnings are worth more than the assets. This validates our reproduction values and further validates our margin of safety calculations.

Sources: Yahoo!Finance as well as Value Investing and Beyond by Greenwald, et al.

*Note: the authors cannot be held responsible for any gains or losses incurred from trades based on this article. Investors should read articles and annual reports before acting on any data presented herein.

**At the time of writing and publishing the author owns 19 shares of BRP.