Brazil's Telecom ADRs Are Oversold

Some sector indexes have lost 10% or more in the last week, but the word "oversold" is not one I've heard recently. Maybe it has something to do with markets having gained 40% in just over two months, or some sort of "brude awakening" to sky high P/E ratios, but value is by no means in apparent abundance.

Telecommunications companies are generally seen as sustainable and growth oriented, and pay frequent dividends to boost cash flow and maintain a strong share price. Verizon (VZ) and AT&T (T) are not up anywhere near 40% from March lows, however they have reported negative growth (losses for AT&T) and were not hit nearly as hard as other sectors to begin with.

Additionally, while the DOW has droppped from 8800 to 8300 and commodities have been hit even harder, domestic telecom has remained relatively unscathed. (Click links below to view the Sogotrade charts that show dividend history and volume, both of primary concern for this analysis)

AT&T Chart

Verizon Communications Chart

Another factor I believe is very significant is that volume for Verizon and AT&T are at all time highs. This volume has sustained for months, whereas overall market volume has been very light since April. These companies pay 5%+ dividends and have pricing power that comes with being leaders in a market with such high entry costs, making them particularly appealing investments in a dreaded recession.

While AT&T and Verizon may be good companies to invest in, they are highly integrated and have their hands entirely full maintaining existing networks and can only attempt growth when technological innovation provides opportunity. More clearly, most people in the US already have a cell phone and most businesses already use communications networks to their desired extent.

When it comes to growth and investment value, Brazil has become the BRIC's ignored "fourth wheel." Russia has ridden the oil roller coaster and most studious emerging market investors have focused on China's huge stimulus package and increased consumption as well as India's political shift. Brazil is assumed to have garnered equal attention, given the country's acronym leading position, but volume and price simply don't agree.

I believe Brazil is irrationally associated with Mexico, which borders the USA and is not even on the same continent as Brazil. Nonetheless Brazil's New York traded ADRs generally move according to news from our notoriously unsavory southern neighbor, such as flu breakouts and mafia activity (these things tend to be perceived as "negative"). More regularly, Brazil ETFs (EWZ) and ADRs fluctuate with the prices of oil and gold, both resources the country is rich in.

Brazil ETF EWZ

Petroleo Brasileiro SA

Compania de Minas Buenaventuras SA

CPFL Energia SA

Companhia de San Basico SP

Tele Norte Leste

Brasil Telecom Sa

Brasil Telecom Participacoes

The last year depicted in the four year charts above shows a uniformity in movement that obviously ignores differing fundamentals. EWZ is concentrated in commodities and financials, which have universally performed similarly, gaining steadily from sharply reached March lows until pulling back recently. PBR and BVN have fluctuated consistently with their respective commodities. Also fluctuating with worldwide commodity markets have been Brazil's water, electric and telecom utility ADRs! Again this may boil down to volume, as unlike US utilities Brazil's are traded more thinly than ever. Still, these are high yielding stocks and growing companies with huge competitive advantages.

Information is much harder to come by for Brazilian ADRs than Asian ones, however Brazil's economy, from all indications, might be the best poised in the world. Bank balance sheets are relatively clean and consumption is at an all time high in what has traditionally been an export-reliant economy. Power and water usage are up and favorable trade terms with China are appparent.

Urbanization and overall growth are reasons to own a stake in Brazil's telecom industry, but price makes now a good time to buy. These stocks are 20-25% down from two weeks ago and many considered them a safehaven then.

Telemar (TNE), which bought Brasil Telecom (BTM, BRP) recently, trades near book value with a PEG of 0.6. I feel less than certain as to how income will be distributed in the future, however Telemar now controls substantial market share. My strategy, therefore, is to own a stake in the parent company and the healthiest offspring. BTM and BRP both trade at lowly Price / Sales ratios under 1/3 with similar growth histories, but BRP has higher institutional ownership and a much stronger dividend and price history.

An important quality of these stocks is that their dividends are not regularly scheduled. They are generally announced with earnings and paid to shareholders of that date, not a future one. What this is designed to do is minimize volatility by encouraging long term investing. What it seems to do is scare investors away and leave the stocks undervalued. I see this apprehension as an excellent opportunity, with urban growth as evident in Brazil as any other country. The charts suggest that dividend announcements may be very near and, unlike most sectors, this is a historical and fundamental opportunity to "buy low."

Disclosure: Long TNE, BRP, CPL, SBS

Comments

[Stockpickin...:]

great read! Thanks! I am going to look more into TNE

Jun 24 08:06 AM

[Alan Young:]

I agree. There are a number of Brazilian utility company ADRs, with solid cash flows and attractive dividends. Yet the market prices fluctuate with the commodity-driven ETF. It's absurd. When oil dips again, buy more Brazilian stocks.

Jun 24 08:53 AM

[Danny Furman:]

Thanks for the responses. I'm really curious how these companies trade on the Bovespa and can only find the following:
www.emerginvest.com/Co.../

Makes the ADRs look even cheaper, no?

Lastly, dividends ***boast cash flow by distributing it, what they **boost is investor's accounts.

Jun 24 10:22 AM

[brascap:]

enter these symbols into finance.yahoo.com and you'll get BOVSPA results. What's interesting is to compare ^BVSP with the DJI>

AMBV3.SA ARCZ6.SA BBDC3.SA BBDC4.SA BRKM5.SA BRTO3.SA CGAS5.SA CMIG3.SA CSAN3.SA GETI3.SA ITUB3.SA ITUB4.SA KLBN3.SA LIGT3.SA LLXL3.SA MYPK3.SA OGXP3.SA PETR3.SA PETR4.SA PRGA3.SA PTPA4.SA RPMG3.SA RPMG4.SA SANB3.SA SDIA3.SA SZPQ4.SA TAMM3.SA TBLE3.SA UBBR3.SA UBBR4.SA UGPA3.SA UGPA4.SA USIM5.SA VALE3.SA

Jun 24 11:06 AM

[Danny Furman:]

Thank you very much brascap. It's amazing how cheap US traded ADRs are compared to Bovespa stocks, with China ADRs it's the other way around! I may have to dig around and concentrate more of my portfolio in Brazil, however I'm confident SBS and the telecom companies will remain my favorites and will probably just add to those positions if I can average down PPS.

Jun 24 11:22 AM

[Danny Furman:]

$1.05 dividend just announced for TNE

Jun 25 12:56 PM

[fed_alchemy:]

danny whata think about TSP also is there an xd date or is it paid

Jun 26 08:36 AM

[Danny Furman:]

TSP "barely missed the cut" for me for a few reasons. It's valued at over twice book value, 9x+ earnings and just paid the last of its dividends til November. TSP pays 4 annual dividends from November through March so it is predictable in that sense unlike TNE.

TSP looks good long term, but I would only consider buying lower and closer to dividend season.

Jun 26 10:05 AM

[lblamboy:]

Danny,

Where are you getting this dividend info - I can't find anything on TNE's upcoming divs...just info on the "suprise" dividend in Feb. 09.

Brian


On Jun 25 12:56 PM Danny Furman wrote:

> $1.05 dividend just announced for TNE

Jun 29 01:49 PM

[Danny Furman:]

Brian,
Click the link to the chart above and make sure the "events" parameters are set to show dividends. The latest dividend has been announced, not paid, so it's not on any chart yet.

Jun 29 02:40 PM