A Focus On Emerging Markets In Telecom Services - Christopher C. King - Stifel, Nicolaus And Co., Inc.
July 19, 2010 - The Wall Street Transcript has just published Wireless Communications and Telecom Equipment Report offering a timely review of the Telecom Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
View Details of This Special Report
Recent Wall Street Transcript Special Reports.
Christopher C. King is a Senior Telecom Services Analyst and Principal at Stifel, Nicolaus & Co., Inc., where he covers telecommunications and cable services firms. In 2010 Mr. King was a number one Financial Times/StarMine award winner for earnings accuracy in diversified telecommunications services. Mr. King has a bachelor's degree in politics and economics from Wake Forest University, and an MBA with a concentration in finance from the University of Maryland.
TWST: What names stand out to you as having improved recently?
Mr. King: From that perspective, you probably need to look at some of the emerging market names. Names like Sprint (S) and Qwest (Q) have done pretty well so far year to date, but that's really been more of a function, in the case of Qwest and Sprint, of starting from a very low kind of sub-4 level for both of them at the beginning of the year. So not a lot of movement per se in the full enterprise value, as both of them have a significant amount of debt. Qwest has since announced they're getting acquired by CenturyTel (CTL), and in the case of Sprint, people are really betting on the company being able to improve some of their operational metrics going forward, if for no other reason than because they've been so poor with a lot of those metrics over the course of the last several years and investors have begun to look for a turning point of operations getting at least incrementally better for them in the near term.
TWST: Any other names you care to mention? Or is that the primary mover and shaker in emerging markets?
Mr. King: That's certainly our top pick, and the stock is trading at around 36 today and we've got 60 target price on it, so that is certainly one that we believe has the most significant upside potential. Millicom would be another one that we would take a look at; it's also unique from the standpoint that it, in our view, is a very nice combination of free cash flow yield as well as subscriber growth. They're the only wireless company that we're aware of in the world that has solid double-digit subscriber growth year-over-year as well as a double-digit free cash flow yield, and that certainly is a rarity in the telecom space. They've been using a lot of the cash flow that they've been generating in their Central and South American markets, where they have monopolies or pseudo-monopolies in a couple of the smaller markets in the region, to fund a lot of their subscriber growth in Africa, where wireless penetration levels are around 20%, 25% today.
TWST: Are any emerging market companies within your coverage not performing as well as you'd expect them to? Are any falling into any pitfalls that might lead to a "sell" rating?
Mr. King: I do not have a "sell" on anything right now, given the multiyear underperformance in the telecom services sector and the current valuation levels. I think that in the emerging markets, a company like America Movil (AMX), which we cover as well, that is experiencing lesser growth certainly than the NII Holdings and the Millicom names, is a name that we would certainly be slightly more cautious on. But America Movil is generally considered to be one of the bellwethers for Latin American stocks, and it is by far the largest carrier across the region. Their lower growth level is both a function of penetration levels increasing throughout Latin America as well as the fact that they are by far the largest carrier in Latin America, and that hampers growth rates simply due to the law of larger numbers.
TWST: In terms of the U.S. market, are there any names that stand out to you as strong investments?
Mr. King: I would say broadly speaking on the U.S. side of things that we try to be very valuation conscious at the end of the day because of our view that this is a mature market - growth is slowing by almost any metric you want to look at, be it total subscribers or revenues, or cash flows or whatever. So from that perspective, you have had most of the pure wireline telecom names in the U.S. really focus on returning cash to shareholders through share repurchases, debt retirements or more frequently dividends. So there are a lot of dividend yields and free cash flow yields that we do find very attractive within the sector, but certainly not names that we would jump up and down about from a growth standpoint. Certainly, names like CenturyLink, which just announced the acquisition of Qwest Communications, is a favorite of ours, as is Frontier (FTR), which is about to close on the purchase of about 4 million lines from Verizon (VZ). Windstream (WIN) would be another RLEC name that we find very attractive at these levels and likely the only one of the three that has the potential for top-line growth over the next couple of years, as well as both Verizon and AT And T (T).
The remainder of this 64 page Wireless Communications and Telecom Equipment Report can be immediately viewed by purchasing online.
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
For Information on subscribing to The Wall Street Transcript, please call 800/246-7673