Peter Lynch Would Love This Telecom Stock
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the annals of contemporary financial folklore, there may not be an investment guru as admired as Peter Lynch. Contrary to the beliefs of most of his peers, Lynch believes that you, the everyday investor, can beat the Street because of your independence. See, while professional money managers live and die by their yearly returns, the average Joe is able to keep plugging along, investing in companies for the long haul. Now, Lynch’s strategy does have a catch; it is crucial to keep a tightly wound portfolio full of stocks that you know from the inside out, top-to-bottom.
See, Lynch believes that the better you know a stock’s “story,” the greater your chance of profiting off of it. This mantra has been developed in three books, the most well known being One Up On Wall Street. For a fresh look at this novel, here’s our review. Aside from his literary works, the odds are that you’ve probably heard some of Lynch’s teachings in financial pop culture, whether it’s the saying “invest in what you know” or the phrase “that’s a ten bagger stock.” Interestingly, there are a few stocks in this current market environment that we believe Lynch would love. One of these is a certain South American telecom stock. We won’t keep you guessing any longer.
Telecom Argentina SA (NYSE: TEO)
Serving over 18 million Argentinian subscribers, Telecom Argentina is the major player in the northerly region of the country, covering the entire capital city of Buenos Aires. The company is the end result of a massive de-nationalization effort that took place in the early nineties, in which the state-owned ENTel was transferred to the private sector. It took TEO around a decade to renovate the country’ decrepit telecom infrastructure, which has transformed the industry into a profitable segment of the Argentinian economy.
In recent years, business has been especially prosperous; TEO has seen its annualized revenues (20.5%) grow substantially since 2008. This growth trumps the telecom industry’s average of -1.7 percent, and that of non-U.S. peers like China Mobile (NYSE: CHL) at 8.6%, Vodafone Group PLC (NASDAQ: VOD) at 4.2%, NTT DoCoMo (NYSE: DCM) at -1.6%, Telefonica (NYSE: TEF) at 2.8%, and Deutsche Telekom AG (NASDAQOTH: DTEGY.PK) at -1.7%. Now, the best part about Telecom Argentina’s story – as Peter Lynch would say – is that the company is very skilled at translating top line success to the bottom line, which is of far more importance to investors.
Over this same three-year stretch, in fact, TEO has grown its earnings by an average annual rate of 37.5 percent, oodles higher than the industry average (4.5%) and the likes of CHL (3.9%), VOD (32.9%), DCM (0.1%), TEF (-9.7%), and DTEGY.PK (-27.4%). Obviously, then, the Argentinian telecom’s margins are impressive, as the company sports operating (20.1%) and net (13.2%) margins that are wider than the industry averages of 12.5 and 4.1 percent.
So, we have determined that Telecom Argentina is a high-growth stock, but that doesn’t mean it is a good buy. After all, growth is only worth buying if it is trading at a reasonable price, and fortunately, its price multiples look very reasonable. Let’s take a look at the price-to-earnings ratio, in which TEO (4.1X) is trading at a massive undervaluation compared to the industry average (24.6X), CHL (11.2X), VOD (13.4X), DCM (12.0X), TEF (9.8X), and DTEGY.PK (11.4X). More importantly, the stock is also trading below its own historical average P/E, both in terms of 5-year (9.2X) and 10-year (10.5X) totals. In fact, Telecom Argentina’s earnings have traded at a 38 percent discount to those of the S&P 500 Index over the past decade. This year, they appear much cheaper, trading at a 72 percent discount.
Looking ahead, analysts are expecting the company to finish 2012 with earnings of $3.34 a share, up from the $2.60 it reported in 2011. By 2013, EPS is expected to jump another 4.8 percent to $3.50. If this consensus holds, TEO should eclipse $14 by year’s end, knocking on the door of $18 by next summer. The stock currently trades in the $11 range. Now, these price targets are set assuming the stock maintains its current valuation, which is already trading at historically low levels. If investors do begin to feel more favorably about TEO, $20 is not out of the question. Throw in the fact that the stock currently sports a 7.5 percent dividend yield and you may have yourself a three-bagger when its all said and done. WealthLift’s Sentiment Index rates Telecom Argentina as a strong buy, with the overwhelming majority of the community’s users placing an “overperform” rating on the stock.
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Fool blogger Jake Mann doesn't own shares in any of the companies mentioned above.The Motley Fool owns shares of China Mobile. Motley Fool newsletter services recommend China Mobile and 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.