What Will These Communications Stocks Tell Your Portfolio?

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

Communications are great. We're communicating right now, and hopefully you'll either get a good idea for your next acquisition or advice to stay well away from something toxic. So let's take a look at some communications companies and the stocks that track their popularity.

Cogent Communications Group (NASDAQ: CCOI) is one of the cornerstones of the Internet. Providing Net access and data transporting as well as data center colocation, I like Cogent's stability as a service provider. Nobody wants the Internet to stop. I also like how Cogent acquired a ton of different network providers early in its life, digging its moat pretty solidly.

Of course, even serious stability has a price. In this case, the price is a P/E ratio that made me do a double take. 807 times earnings? Really? I believe 7 times book value and 3.6 times sales, but the profit margins Cogent is pulling are miniscule. For a company with a market cap of just over $1 billion, pulling .5% profit margins seems to be playing things a bit liberally for my tastes. While the Internet is solid, it's still technology, and technology's only constant is change. I don't see Cogent riding out changes all that efficiently, so I would encourage you to tread lightly here.

Oi S.A. ADS (NYSE: OIBR) is the second largest telephone company in Latin America by the number of lines it holds and the revenues it generates, the largest being America Movil. This level of size and market penetration gives Oi a pretty solid moat in and of itself. The pot gets sweeter with seriously low valuations. Why are people only paying 5 times earnings and .6 times book value for a deeply entrenched utility that pays a 7% dividend?

Only two things come to mind, and they're not exactly world-enders. Firstly, Oi is only making 4.3% profit margins. While it is a lot better at turning a profit than Cogent, it's still not super to have a company that can only turn around 1/20th of what it takes in. Secondly, and this is just lame, Oi may actually just be a company most people have never heard of. It's got a funny name, it's headquartered in South America and a lot of people in the US may have never thought of Rio as the headquarters of anything besides Mardi Gras. But from what I've seen so far, I suggest checking into Oi as a buy, particularly if it can produce higher profits.

Telecom Argentina SA (NYSE: TEO) is just known as Telecom in Argentina. Rather like Fed-Exing something or using Kleenex, it's good to be set in people's minds like that. I like that 4.21% of Telecom is owned by its employees, as I like how hard that gets people to work. I've worked for employee-owned companies, and it's generally good for morale to feel like you're working for yourself with the support of an experienced group. I also respect Telecom's 11.5% profit margins and trading valuations close to Oi's levels. It's hard to fault a company with a 5.63 P/E ratio that has such a lock on Buenos Aires

However, every silver lining has a dark cloud. While 41.5% of Telecom is publicly traded, 54.74% of the company is owned by a consortium that includes Telecom Italia, France Telecom and the Werthein Group. So if you like to flex your shareholding muscles, you'll have a tough row to hoe getting past the aristocrats at the top. Since most people don't vote their shares actively, this is a minor concern. 

And of course, there's the way Telecom likes to flex its muscles. Being the main game in town, Telecom can screw people over at its leisure. How would you like to be able to tell several million people that they have to pay for their phone service by the minute instead of a flat rate like everybody else has? How would you like to receive government subsidies to expand service into rural areas and either completely avoid doing so or simply install token pay phones instead of adding service properly? How would you like to be able to write up overly complicated contracts that include prices that ignore taxes and that omit important information about the service terms?

These are some of the criticisms that Telecom has come under fire for over the years. As a potential shareholder, I'd have to ask myself: If the company is willing to throw its customers under the proverbial bus, how much loyalty could I expect? I think Telecom is cheap because not a lot of people really want it, 5.9% dividend or not.

We've looked at a hardcore Latin American brand, a center piece of the Internet and a major telephone company and they all say something. In some cases they say they couldn't care less about their shareholders, while in other cases they say their adaptive capacity isn't that great. No matter how big, well known or profitable a company is, sometimes you have to read between the lines a bit.

pongun 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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