Buying Brazilian Stocks (Part II): Telecoms

Includes: TNE, TSP, VIV
by: Nicholas Pardini

<< Return to Part I

This the second part of my week long series highlighting the best opportunities in Brazil (see part I here). In this article, I will cover the telecom sector.

With over 190 million people, Brazil has a large base of potential subscribers with rising real incomes. The appreciation of the real should also be positive for international investors in these stocks. Below I break down three of the top Brazilian telecom companies and which one is worth buying.

Vivo Participacoes S.A. (NYSE:VIV)

Vivo is the leading cell phone company in South America with over 60 million users. It is also a mobile applications company that specializes in voice mail, text messaging, and smart phone applications. Growth prospects are great as earnings growth is expected to be 33% annually, yet it is priced at a bargain with a PEG ratio of 0.41. It also pays a high yield of 7.85% and has a consistent payout record. Overall, I think Vivo is the best telecom buy in Brazil because it has the best growth prospects due to the industry's trend toward mobile and smart phones.

Tele Norte Leste Participacoes S.A. (NYSE:TNE)

Tele Norte is the country's leading telecom company with a 19% market share and $18.75 billion dollars in sales. However, its financials are concerning. The company has 3.93 debt to equity ratio and expected earnings growth at an anemic rate of 0.1% annually for the next five years. This can be accounted for by consumers moving away from landlines, which make of a large percentage of TNE's revenues. Although Tele Norte is the industry leader, its reliance on landlines, high debt levels, and lack of a dividend make it the weakest choice of the three top Brazilian telecoms.

Telecomunicacoes de Sao Paulo S.A. (NYSE:TSP)

The combination of a 15% dividend yield , a P/E of 8.86 and a recent upgrade from Barclay's Capital makes the stock intriguing. However, TSP lacks a consistent track record of paying out its dividend which is higher than its current earnings per share. The company also suffers low growth due to its dependency on fixed landlines and cable services. Despite the prospect of a high dividend yield, this company is weakening versus competition and may be a short candidate for emerging market bears.

Overall, the telecommunications sector of Brazil has performed strongly and will continue to be profitable as more Brazilians adopt the use of cell phones. However, in the near term, these stocks seem to be overbought as they have all ran up by an average of 20% over the past ten days. Expect a correction to occur within the next thirty to sixty days which will erase most of the breakout before buying into these stocks. I think that Vivo is the best buy of the three, but the sector moves in a correlated pattern.

>> Continue to Part III

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.