by Ivan Martchev | August 6, 2012 12:01 pm
One good thing that has come from the mixed global economic data is that stock picking finally is working again — “good” stocks are going up, while “bad” stocks are underperforming.
This is particularly evident in a sector like telecoms, where there have been many opportunities in companies that have managed to make the transition from legacy to next-generation technologies, particularly those geared toward the explosion of mobile data traffic.
The largest telecom north of the border, BCE Enterprises (NYSE:BCE), is a case in point. At present, 81% of revenues are geared toward next-gen technologies — wireless (30%), satellite/Fibe TV (10%), Internet/mobile data (25%) and media (16%). Part of the remaining 19% of wireline voice also can be converted if fiber-optic cable covers all landlines.
Management realized years ago the need to invest in next-generation technologies, which resulted in BCE more than doubling its share of the Canadian wireless market, from 18% in 2007 to 39% in 2011.
What is more important, 52% of BCE wireless subs have smartphones today, compared with 34% a year ago. This is causing a 31% year-over-year surge in data traffic, as well as a continued climb in average revenue per user (ARPU). Some day, the vast majority of BCE mobile devices will be smartphones, which allow for numerous commercial activities that never were available with regular cell phones.
BCE has put itself in a position to be the leader in wireless services in Canada, but management also has diversified the company better than most U.S. counterparts of similar size. The company’s sustainable 5% dividend yield offers serous support for the shares at a time when both U.S. and Canadian long-term interest rates are at record lows.
The largest wireless telecom company south of the border is Mexico-based America Movil (NYSE:AMX), which is the second-largest wireless company outside of China with 290 million access lines; No. 1 is Vodafone (NASDAQ:VOD) with 382 million. The Chinese market, by virtue of its sheer size and regulatory structure, has made China Mobile (NYSE:CHL) No. 1 overall with 617 million access lines, and China Unicom (NYSE:CHU) is No. 3 with 329 million access lines.
Right now, Latin America shows mobile market penetration of 100%, and it theoretically could grow past that as many consumers don’t have access to landlines and use one cell phone for business and one for personal calls; there are phones with dual SIM cards available on the market in Latin America so you don’t have to carry two devices.
The opportunity here — as with most emerging-market-focused wireless carriers — is mobile data. This is because America Movil’s target market has only 15% market penetration of mobile data for its customers at last count — a number expected to grow to 30% by 2013.
Increasing the number of smartphones sold also will increase the average revenue per user (as is BCE’s and other developed carriers’ experience), which is the next biggest growth opportunity. This will take time as smartphones typically are not subsidized in most emerging markets, particularly with the more popular (but lower-ARPU) prepaid plans.
America Movil trades at 4.4 times book and about half the valuation it had five years ago. While it is unlikely to grow as fast as it did then, mobile data traffic should be highly beneficial to AMX.
The percentage of prepaid versus postpaid (contract) customers is highly dependent on the well-being of the target consumer. In more developed economies, contracts are the norm, while in emerging markets it is the other way around.
The Philippines is one of the less-developed Asian markets with GDP per capita of $2,223, but that simply means bigger potential for development. Philippine Long Distance Telephone (NYSE:PHI) is the dominant telecom in the Philippines. The company had 66.1 million mobile subs at the end of March 2012, with net additions of 2.4 million from year-end 2011. Of the total, only 2 million were postpaid customers and only 2.1 million had wireless broadband.
Needless to say, most of those customers don’t have smartphones, but when that changes in the next five years, ARPU should be substantially higher. Management aims to pay a dividend twice a year, with the current 4.5% yield being quite competitive.
In Indonesia, with GDP per capita of $3,508, the state of the wireless market is naturally more advanced. The wireless penetration is 107% to 255.3 million access lines (with separate business and personal phones for many consumers). Since it was too costly to run landlines to remote locations for years (to customers who could not afford the bills), the wireless boom has helped many emerging markets develop a more vibrant business environment.
Indonesia’s PT Telekomunikasi Indonesia (NYSE:TLK), or simply Telkom, has 43% of the wireless market in one of the most vibrant economies in Asia, whose proximity to China and abundance of hard and soft commodities have helped coin the term “Chindonesia.”
Indonesia never experienced a recession in 2008 and presently is growing GDP at 5% to 6% a year. This has caused the economy to more than double its GDP from $432 billion in 2007 to an estimated $928 billion in 2012, which is causing a surge in disposable incomes and likely will cause a surge for postpaid wireless services with higher ARPU. Only 5.2 million mobile customers have broadband data contracts, so that should grow exponentially in the next five years.
Dividends here too are a little erratic, but usually paid twice a year with a not-too-shabby current yield of 2.8%. They also have room to go higher as Telkom’s revenues grow with the introduction of new services.
Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own. Navellier & Associates does not hold positions in the stocks mentioned in this article for its clients. This is neither a recommendation to buy nor sell the stocks mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell the aforementioned securities.
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