The Financial Times ran a headline several weeks ago that really stuck with me:
"Emerging markets fuel consumer goods groups."
Of particular note, Procter & Gamble saw 60% revenue growth in Turkey compared to the same period last year. Granted, sales in Turkey had been depressed during the crisis. But 60% growth? Let's just say the Turkish consumer is back.
In prior articles, I have recommended investing in premium cigarettes as a way to profit from rising incomes in the developing world. Today I'm going to start with a recommendation that is every bit as addictive as nicotine but considerably less dangerous—that is, unless you use the product during Istanbul rush hour.
Today's recommendation is a Turkish company. And as hard as this might be to believe, it's a company that sells a product even more ubiquitous in Turkey than cigarettes. I am talking, of course, about mobile phone operator Turkcell Iletisim Hizmetleri AS (TKC). Turkcell is a perfect way to play the most powerful long-term trend in the global economy: the rise of the Emerging Market Consumer.
- Turkcell is a premier, world-class company with a dominant market position in a dynamic emerging economy
- It sells a service that has become a basic necessity for both consumers and businesses—meaning that it is recession resistant
- It is a direct play on the Turkish consumer
- It is conservatively financed
- And it pays a rock-solid 4.1% dividend
Before I go into further detail on Turkcell, let's take a look big-picture look at Turkey itself.
The recommendation of a Turkish company is bound to raise a few eyebrows. The country has a well-deserved reputation for instability, military coups d'état, Kurdish separatist terrorism, and hyperinflation. Turkey also happens to be currently governed by the AKP, a party with roots in political Islam.
All of these are valid concerns. They are also wildly exaggerated.
Since the fall of the Ottoman Empire in WWI and the establishment of the Republic of Turkey by Mustafa Kemal Atatürk in 1923, Turkey has been a secular state, and emphatically so. Atatürk viewed the influence of political Islam as a major impediment to growth and modernization, and his anti-clericalism would rival that of Revolutionary Republican France. He went as far as to outlaw the wearing of the fez by Turkish men and strongly encouraged Turkish women to adopt Western dress.
The AKP is in many ways moving in the wrong direction, at least to Western eyes. Atatürk would be rolling over in his grave if he knew that the wives of the current president and prime minister wore head scarves. Still, the country's basic secular character has not changed. Turkey is not Iran, nor will it become Iran any time soon.
The days of triple-digit hyperinflation also appear to have passed, at least for the time being. Turkish inflation is still high at 9.6%, but not disruptively so. And while PKK Kurdish separatists still have the occasional bombing in Istanbul, the group has been largely pushed to the country's southeastern fringe. Turkey will never become as stable as, say, Switzerland. But it's stable enough for me to consider for long-term investment.
Figure 1: Emerging Market Valuations
click to enlarge
Turkey is a vastly underrated emerging market. The country is to Europe what Mexico is to the United States—a developing country with a large, young population right at the doorstep of the developed world. It's also a country that has been largely ignored in the current obsession with the "BRICs" (Brazil, Russia, India, and China). And herein lies our opportunity. While investors chase what is hot, we can get Turkey for a bargain.
Figure 1 compares the valuations of selected emerging markets. Peru, of all countries, is the most expensive of the lot, trading at P/E ratios reminiscent of the late 1990s Nasdaq bubble. India is also quite pricey for an emerging market, with a P/E ratio of 22.7. Turkey, in contrast, finds itself near the bottom of the list, lumped in with the likes of Argentina and Russia.
But there is a big difference between Turkey and these other two laggards. Turkey is an up-and-coming country with a young population, rising incomes, and a diversified economy.
Russia is almost entirely dependent on oil and gas, and its demographics are horrid. Argentina is a basket case and, sadly, likely always will be. Yes no matter how many times investors get burned there, they seem to never learn their lessons. Argentina has some of the best farmland in the world…but little else to interest us as investors.
The Case for Turkcell
Turkish stocks have recovered nicely from the global crisis, hitting new highs. But interestingly, Turkcell has not fully participated in the rally.
Figure 2: Turkcell
As you can see in Figure 2, Turkcell is trading for barely half of its old all-time highs. Much of this is due to the industry. Telecom providers have come to be viewed by investors as little more than high-tech utilities. And as a result, global telecom shares have massively underperformed more aggressive and cyclical sectors like financials, technology and industrials in 2009 and 2010.
It is as if investors have forgotten the telecom sector exists, and as a result of this neglect you can scoop up some real bargains. American giants AT&T (T) and Verizon (VZ) both sell for dividend yields over 6%. Not bad, given that the 10-year Treasury yields a measly 2.6%.
In Turkcell, we potentially get a much better investment than AT&T or Verizon. Both of the American giants have enormous "legacy" businesses in the form of their fixed-line services. They also operate in a mature, largely saturated market.
Turkcell, however, has none of these problems. The company has no legacy operations, its market is still far from saturated, and it has far less competition than its American peers.
Consider Figure 3, which compares mobile phone penetration rates by country. As you can see, much of Europe has penetration rates well over 100%, as some households have multiple mobile phones. Turkey's market penetration is barely a third of that of neighboring Greece and is substantially lower than every other country on the list.
While the mobile phone is hardly a novelty in Turkey, the country still has a long way to go before it reaches the saturation point. This is good news for Turkcell.
Figure 3: Mobile Phone Penetration by Country
The company's relative lack of competition is also good news. Turkcell has 56% of all Turkish subscribers (see Figure 4), but the company also takes an even larger share of the industry's revenue at 61%. This says that not only is Turkcell the biggest carrier, it also competes by offering higher-value added service.
This is not a sleepy, provincial telecom provider. With its 35 million subscribers in Turkey and 63 million total subscribers scattered across Eastern Europe, Central Asia, and the Mediterranean, Turkcell is the third largest GSM operator in Europe in terms of subscriber numbers.
It is also one of the most sophisticated. The company was among the first operators in the world to reach a speed of 42.2 Mbps with its 3G technology. Not bad for a "boring" utility stock yielding 4%!
Figure 4: Turkish Mobile Phone Market Share
Turkcell's subscriber mix is also changing for the better. Unlike in the United States, where the vast majority of cell phone users have long-term monthly plans, prepaid or "pay as you go" phones are far more popular in many emerging markets. Turkcell is no exception to this. 26 million of its 35 million subscribers are prepaid customers. This hurt the company during the financial crisis, as many consumers reduced their mobile phone usage when money got tight. Going forward, the company should be far less susceptible to this risk. Turkcell's subscriber mix is shifting, with the number of post-pay "plan" subscribers rising 25% in 2009 while the number of prepaid customers is falling slightly. It's a subtle thing, but it is a sign of Turkey's growing maturity as a modern consumer economy.
So, let's review the facts. In Turkcell, we get:
- A world-class company trading at an attractive price
- A great dividend yield at 4.1%
- Exposure to a promising emerging market that has been overlooked by most investors
Looks like the makings of a winner to me. Action to take: Buy shares of Turkcell. This is a long-term holding that you should plan on having in your portfolio for the next 2-5 years, if not substantially longer.
Disclosure: Long TKC, T, and PG