Argentina: Value Trap or Long Term Opportunity?

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

Will Argentina Become Venezuela?

I don’t think so (yet) although a mix of: 1) FX Exchange Controls (since official exchange rate is largely overvalued), 2) this year's government nationalization of YPF 3) doubtful official inflation statistics (true inflation rate is running around +20%) and above all 4) a remarkably anti-market rhetoric make me question whether every security that looks awfully cheap is a potential value trap or an actual long term opportunity.

Before I follow with this story, I need to stress I – still - do not own any shares at the companies I will mention below but, as I will specify in WarrenTrades, I do own some Argentina related corporate bonds and Argentinean Government Bonds. All fixed income securities. But I will surely consider the two stocks I shall describe in this article if prices go down enough.

Let’s put things in perspective. We are living through one of the longest commodity booms in modern history and this has allowed countries such as Bolivia to pay a rate lower than 5% for a ten year bond issue. Meanwhile, two politically troubled countries located in the same resource rich region, Argentina and Venezuela, have not been able to enjoy such financial luck. Yes, GDP growth was remarkable during last ten years but, to set an example, Argentinean bonds maturing in 2015 pay a yield over 12% even when Argentina's USD denominated debt in the hands of private investors is lower than 9.5% of GDP. Investor sentiment towards Argentina is highly negative.

I met many people in my life that made fortunes buying when sentiment was poor so I see the two securities below as long term opportunities. 

A lot of Value and a lot of risk.

Grupo Financiero Galicia (NASDAQ: GGAL): GGAL is the holding company that owns Banco de Galicia, one of the biggest banks in the country, and it is growing aggressively without affecting its loan quality. It has huge geographic presence across the national territory and it has been highly profitable in the aftermath of the 2002 economic meltdown that took Argentina to default in its public debt. Let’s see some quick numbers: ROE is 37% and ROA 2.6% the Price to Book stands at x0.7 and its forward P/E is x1.5. Total Market Capitalization stands at 582 M USD. This bank is going to be an M&A target but I don’t know when. The risk here would be the government putting pressure on the banks to increase lending to the Public Sector.

Telecom Argentina (NYSE: TEO): Taking market share (now standing at 33.6%) quarter after quarter from peers - such as Claro, a subsidiary of America Movil and Movistar, a subsidiary of Telefonica– TEO remains a cash flow machine producing $400M of Free Cash Flow a year with $500M of net cash in its balance sheet. The company is trading at a 1.5x 2013 EV/EBITDA multiple and a x3.3 forward P/E multiple. You can get all this for a total Market Capitalization of $1.99B. On top of all this, TEO owns a high growth highly profitable Paraguayan operation with +2.3M mobile clients. In this case, the risks here are related to the impediment the government is putting on the company to distribute dividends becoming permanent and the risks related to the government restricting price hikes in the future – although the government just authorized a 12% price hike for TEO's mobile services.

I would wait to see what happens with Argentina in 2013 and I would keep these two companies in my watch list. High rewards might follow good timing.


martinzaldua has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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