- 23% revenue growth, 19.2% EPS increase year-over-year.
- Fair value price of $35 versus $16 current price provides 50%+ margin of safety.
- Mobile ARPU of $8.67 and broadband revenue growth over 30% provide key drivers for 2014.
Telecom Argentina (NYSE:TEO) affords investors a relatively fast-growing telecom stock with solid financial underpinnings and 4%+ dividend yield. TEO's most recent earnings call highlights a company enjoying strong growth in a difficult macro environment. TEO's long-term debt of $27.9 million is basically nothing for a company of this size. Despite theories TEO would saturate its market and run out of growth opportunities, revenue increased by 23% from 2012 to 2013. The total user base is not growing quickly, but the usage per customer is growing very rapidly.
Operating income before depreciation and amortization increased by 15%. Net income rose 19% yoy to $406 million. Net cash rose from $463 million at the end of 2012 to $679 million for 2013. Free cash flow was $281 million. TEO also carries little debt denominated in foreign currencies which protects it from FX exposure as the Argentinean peso continues to deteriorate. The earnings call transcript provided by Seeking Alpha offers additional detail from TEO's latest release.
There are some caution flags. Fortunately, the single biggest 2013 issue for TEO investors was abated. The government pressured TEO to suspend dividend payouts and invest more money in service enhancements, but the dividend was paid in late December of 2013 and TEO increased capex devoted to service expansion.
Inflation in Argentina continues to run rampant and government policies seem to exacerbate the problem. TEO forecasts continued inflation, with 3.7% reported in January alone, and difficult labor negotiations on wages are expected as a result. Although revenues were up 23% yoy, labor costs were up 27% and taxes were up 33% due to increased revenue combined with rate increases. It is not clear inflation per se is inherently bad as long as a company retains contemporaneous pricing power. Ultimately inflation at these levels is destructive, but TEO appears to understand this environment and is riding the wave by balancing price and wage increases on a steady upward spiral. They may need to sell wheelbarrows at some point for customers to carry their money around, but the wheelbarrows will apparently be well built and priced correctly.
Margins were compressed over the past three years and declined from 22% to 17%. TEO noted on the earnings call it recognized this problem and would make a best effort to control margins, but also felt some events may be beyond their control. For good or bad, CAPEX increased as a percentage of revenue to 18% versus 15% in 2012. This may simply be smart politics or a response to customer demand. The government pressured TEO to increase network reach and quality so this investment allows TEO to both mollify the government and prepare for future growth.
Fixed lines in service remained static over the past year, but broadband and data increased rapidly. Data services were up 31% in 2013 over 2012. This represents steadily accelerating growth over the past four years. Mobile revenues, the other growth driver, were up 26% in 2013 and mobile ARPU reached $8.47 per month in FY13 (+15.8% vs. FY12).
If you're a new investor in Telecom Argentina study the price chart for the last year carefully before jumping in. TEO regularly pops and drops in a range of 5-10% around its average price and one may want to wait for a small drop or at least avoid a pop before buying above the average price. Using the current downward pressure on all emerging market stocks creates a buying opportunity.
Assuming ADR EPS current earnings of $2.02 per share and a growth rate of 15% (well below the average over the past four years) TEO's fair value is $50 a share. Dropping the growth rate to 10%, the fair value is still $35 with a margin of safety over 50%. Fair value, of course, does not suggest anyone will ever pay that price, but it does suggest a relatively conservative investment with a healthy dividend payout and potential price appreciation while one is waiting for a fairer price.