Here in the United States, one of Siemens AG‘s (NYSE:SI) businesses is Siemens Enterprise Communications, 51% owned by private equity firm Gores Group. While telecommunications is an important part of Siemens’ business, it is clearly a small piece of its overall global revenue. Siemens is more a conglomerate like General Electric (NYSE:GE). Those interested in a pure-play global telecommunications outfit might want to consider something other than Siemens. The company I had in mind is Tele Norte Leste Participacoes (NYSE:TNE), a leading telecom company in Brazil.
Use of Cash
Since current CEO Peter Loescher was hired in 2007, Siemens has made very few acquisitions. One of the few acquisitions it did make was its purchase of Solel Solar Systems for $418 million in 2009. Since that acquisition, profitability in the renewable-energy division has dropped in half. At the same time, Siemens’ focus on growing its healthcare, energy and industrial gear organically without new purchases has built up a cash hoard of $18.9 billion. That’s almost $22 a share in cash.
Current shareholders must be wondering when the company is going to part with some of that cash. Its annual dividend is $3.78 per share, which at current prices is a yield of 3.5%. Given that its trailing 12-month earnings per share is $7.23, and that Siemens is sitting on such a large pile of cash, it really ought to be handing out special dividends if it’s not going to make any acquisitions. Siemens investors must know they are looking at dead money.
Third-Quarter Earnings
Fortunately for SI investors, the company’s third-quarter earnings report showed that free cash flow for the first nine months of 2011 was reduced by $1.7 billion, to $2.4 billion. Considering it doesn’t know what to do with its cash, the company might as well generate less.
I’m being facetious, of course. Although revenue in the quarter on continuing operations was up 8%, Siemens’ income from continuing operations was down 47%. Furthermore, its return on capital employed on continuing operations was 11.3%, 570 basis points lower than it was in the same quarter a year ago.
By almost every measure imaginable, Siemens’ third-quarter performance was unspectacular. It reports fourth-quarter earnings Nov. 10. I don’t imagine they’ll be any better. Siemens stock at current prices isn’t terribly expensive. However, I think there are better opportunities out there and Tele Norte is one of them.
Brazil
In late August, Bill Gross, the well-known PIMCO fund manager, suggested he prefers investing in the “cleaner” dirty-shirt countries of Canada, Australia, Mexico and Brazil. He’s clearly become concerned about both Europe and the United States.
So what, besides being in Brazil, makes Tele Norte a good investment? At first glance, its third-quarter earnings, ended Sept. 30, leave little to desire. Net profit fell 21% to $249 million and revenue fell 6% to $4.0 billion. The biggest concern in the quarter was the depreciation of the Brazilian real. On a positive note, net debt declined in the quarter by 17%, to $9.4 billion. The company’s foreign-currency debt is 33% of its total debt, but because of its hedging policy, only 2% of its total debt was affected by depreciation.
Tele Norte’s current enterprise value is 2.34 times EBITDA. Its stock is down 26.5% in the past 52 weeks and year to date is off by 19.9% as of Oct. 28. Furthermore, TNE is trading 61% below its five-year high of $28.14.
How cheap is it? On a price-to-sales basis, it is cheaper at 0.3 times than virtually all its peers. For instance, AT&T (NYSE:T) currently trades at 2.4 times sales. In recent years, Tele Norte has underperformed most of its peers. However, over the long term — say, 10 years – it has outperformed the telecom services industry by 200 basis points annually and the S&P 500 by 480 basis points.
As the largest telephone company in Brazil and the second largest in Latin America, its stock is bound to appreciate soon enough. Out of 23 analysts, nine give it a buy, one to outperform and 11 a hold rating. Only one analyst has an outright sell rating on the stock. While it’s not breaking any records, TNE’s upside looks good.
Bottom Line
When it comes to investing, the best returns often seem to come from those businesses that are more focused. In a comparison between Tele Norte and Siemens, Tele Norte wins hands down.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
