You Can’t Miss this Telecom Company

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

Global telecom companies have diversified their operations globally, which reduces their operational risk. While diversification is good for the portfolio, it also reduces the rewards, which makes it tougher for the telecom giants to globally stage their turnaround. It is for this reason that spotting high growth opportunities is difficult. Portugal Telecom (NYSE: PT) is one company that had its operations limited to Portugal. The company started diversifying its operations few years back, and is ready to stage its turnaround and here are a few reasons why this stock could be a good play.

Diversification in Brazil

Portugal Telecom is the largest telecom company in Portugal with a significant presence in Brazil and China along with some African nations. Investors have sold almost anything that’s based in Europe, and this stock also fell for the same reason. The company recently acquired a stake of 25.3% in Oi Telecom (NYSE: OIBR), and as a part of the $7.2 billion deal, Oi Telecom now owns 10% stake in Portugal Telecom. Oi Telecom is the largest telecom company in Brazil, having a near monopoly in the country.

This gives Portugal Telecom the opportunity to expand its portfolio in Brazil, a country which is considered to be one of the top five growth economies for mobile services. The middle class in the miracle nation is growing rapidly which provides the telecom operators a tremendous growth opportunity. To capitalize on the opportunities, Vodafone (NASDAQ: VOD) is also looking to enter the telecom market of Brazil. The company earlier approached Portugal Telecom for the same but the deal didn’t go through. Desperate to expand in the country, Vodafone then bid for TIM Participacoes (NYSE: TSU) which is another telecom company based in Brazil and a direct competitor of Oi Telecom. The efforts of Vodafone were again unsuccessful and the bid was taken off.

Since Oi Telecom is already well placed in Brazil, the company doesn’t need to spend valuable resources on marketing. The cash generated from the deal with Portugal Telecom will be used to consolidate the Brazilian market, primarily to beat the market competition, and to take full advantage of the growth story of Brazil.

Financials

Portugal Telecom has over 7.4 million wireless subscribers and over 1.1 million broadband subscribers. Under the agreement, Portugal Telecom would be getting 50% of the revenues generated by Oi Telecom. It is because of this acquisition that the revenues of PT shot in excess of 82% compared to the year ago quarter. The company reported profit margins in excess of 45% with EBITDA margins in excess of 34%. The EPS growth this year was an astronomical 150.8% and amidst a glum period of the global economy, the results showed their luster.

Fundamentals

The company with a market cap in excess of $4.4 billion yields a stellar 16.58%. The average yield of the S&P 500 stands at 2.8% which looks tiny compared to Portugal Telecom’s yield. The P/E of the company stands at 14.91, below the industry average of 20.4, the price-to sales ratio stands at 0.4 against the industry average of 1.1, and these numbers altogether make the stock attractive to investors.

The buyback frenzy

The company recently announced that it would be initiating a share buyback program. The company has set a budget of 200 million Euros, and the share repurchase will be done in the open market. It is by 2014 that the share repurchase would be complete, and for the investors this could be a profitable ride.

The Foolish takeaway

Though the telecom company has presence in other countries, it has its strongest base in Portugal and Brazil. The financial benefits of the venture in Brazil have just begun to reflect on the books of Portugal Telecom giving the stock a room to appreciate. The analysts at Morningstar believe the stock could appreciate to $8 mainly because of its strong presence in Brazil. The stock could make it to any dividend income portfolio, and be a value pick at the same time. The financials are skyrocketing and with the buyback scheme on roll, the stock has a Foolish buy rating.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Vodafone Group Plc (ADR). 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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