The Message Is Not Important, Yields Are

Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As distances shorten and cables grow longer, the size of the message is ever less an issue. Holding longer conversations on the phone became worldwide reality. Communications companies CenturyLink (NYSE: CTL)VimpelCom (NASDAQ: VIP), and Oi (NYSE: OIBR) found success in their domestic markets and have looked at the international arena for more.

Communications Int’l Stock #1

Around February, 2013, CenturyLink cut dividends for the first time in 40 years in order to free cash for a future buyback. Hence, after a rampant acquisition spree, the stock price plummeted with the announcement. Management then settled differences with shareholders at a fair price, and business continues to be profitable for both.

In the future, CenturyLink will be looking to recover revenue due to inefficiencies associated with acquisitions integration. For the same reason, there are plans to build another 4,000 fiber towers and start an effective advertising strategy to drive demand and revenue. Additionally, acquisitions have been successfully integrated into the model, improving the product portfolio and increasing international presence.

Financially, CenturyLink has a strong balance sheet. The last decade left a stable debt-to-cash ratio and revenues and free cash increased. On another note, the operating margin has decreased, remaining 4 points above the industry average (11.7). Nevertheless, it is expected to improve as acquisitions and capital invested become fully operational.

Currently trading at 25.1 times its earnings, just above industry average (22.3), the stock is fairly priced. CenturyLink is made attractive by a 7.20% yield and the fact it is trading close to its 52-week low of $32.05. I recommend it as a long-term investment because the company holds a remarkable market position.

Communications Int’l Stock #2

With operations in all continents, VimpelCom has shown remarkable growth in revenue after the Great Recession. A proven business model allows for international expansion and a strong operating margin. The firm built a strong base in Russia and has subsequently moved into adjacent and then global markets.

Any short-term goal for VimpelCom is part of a greater strategy that began in 2007 with the acquisition of Golden, today Russia’s largest broadband provider. VimpelCom’s entrance to the Ukrainian mobile market gave the company a regional profile in 2010. But, Wind’s acquisition in 2011 took the company to sixth place among world mobile operators. So, management’s attention has recently been directed to successfully integrating acquisitions.

The balance sheet for Vimpel is almost perfect. High debt levels associated with the latest acquisition have caught investors' attention too. The good news is that a steady revenue and cash flow trend, coupled with a stabilizing operating margin 7 points above the industry average, relieves any debt worries. However, the Algerian issue may shortly disrupt the business model.

Trading at 7.4 times its earnings, a 72% discount to the industry average, the stock is undervalued. Also, a 10.22% yield makes VimpelCom pure gold powder. However, management infighting and the Algerian issue make the firm not suitable for long-term investment at the time. I recommend holding off until the Algerian issue is resolved.

Communications Int’l Stock #3

The second largest communications provider in Latin America, Oi, provides phone services (landline and wireless, Internet, and other digital solutions). Most recently, the company received its new CEO Zeinal Brava, who comes from Telecom Portugal, giving way to merger rumors. If the merge occurs, the domestic business will turn global in the back of Telecom.

In the short-term, Oi will settle in new management. Mr. Brava has to start addressing current stagnated indicators. For the long-term, the company has to reinvigorate the business model. Higher competition and a model close to exhaustion are putting pressure on management to continue growth through a new strategy. 

Looking at finances, Oi is almost spotless if not for debt. Over the past decade revenue, net income, and cash flow have been on the rise. A rising operating margin has accompanied this growth, and today stands at 18.3%, 7 points above the industry average. Debt, however, has become a rock-in-the-shoe and management is expected to cut dividends in return.

Oi trades at 1.7 times its earnings, a 90% discount to the industry average, while its yield stands at 16.67%; the stock is a fair offer. I recommend holding until the merge occurs or the company diversifies operations.

One message

Although I recommended CenturyLink, Vimpel is my preference. Vimpel offers a higher yield and is present in less penetrated markets, and losing an asset may only mean a new important acquisition. On the other hand, Oi will only see better revenues after diversifying into other communications related services.

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Damian Illia has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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