2 Telecom ADRs With Reasonable Valuations, Good Growth Prospects, Rich Yields

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 |  Includes: TEF, TEO
by: Bret Jensen

The market continues to rotate into defensive sectors such as telecom and healthcare as well to search for safe yields. One area that might bear considering is foreign telecom ADRs with reasonable valuations, good growth prospects and great yields. Here are two stocks worth looking at:

Telecom Argentina (NYSE:TEO) - Telecom Argentina S.A., through its subsidiaries, provides fixed-line telecommunication services and other telephone-related services in Argentina. It operates in two segments, Voice, Data, and Internet; and Wireless. The Voice, Data, and Internet segment provides local and domestic long-distance telephone services, and public telephone services; international telecommunications service, including voice and data services, and international point-to-point leased circuits; data transmission and Internet connectivity services, such as dial-up and broadband connections, ADSL dedicated lines, private networks, national and international broadcasting signal transport, and videoconferencing services; information and communication technology services; and supplementary services, including call waiting, call forwarding, conference calls, caller ID, voice mail, and video calls and itemized billing, as well as telecommunications consulting, and telecommunications equipment and maintenance services.

Valuation and Price Targets – Telecom Argentina is selling at just over 8 times both this year’s and next year’s projected earnings. It is expected to grow revenues by over 13% this year and 8% next year. Consensus earnings estimates for 2011 and 2012 have also been raised over the last two months. It yields a rich 6.9% dividend yield and has a price to cash flow ratio of less than 5. The company has a pristine balance sheet with approximately $2 a share in net cash. Its mobile customer base is growing at over 13% a year according to its last earnings conference call. TEO is selling at a little under $23 a share. S&P has a $26 price target on TEO and The Street is at $30.

Telefonica (NYSE:TEF) - Telefonica, S.A. provides fixed and mobile telephony services primarily in Spain, rest of Europe, and Latin America. Its fixed telecommunication services include PSTN lines; ISDN accesses; public telephones; local, domestic, and international long distance and fixed-to-mobile communications; corporate communications; video telephony; supplementary and business-oriented value-added services; network services; leasing and sale of handset equipment; and telephony information services. The company’s Internet and broadband multimedia services comprise Internet service provider service; portal and network services; retail and wholesale broadband access; narrowband switched access to Internet; naked ADSL, a broadband connection; residential-oriented value-added services; companies-oriented value-added services; television services, such as IPTV, cable television, and satellite television; and Fiber to the Home, a service for high speed Internet access and digital video recording.

Valuation and Price Targets – Telefonica is selling at under ten times both this year’s and next year’s projected earnings. It yields a rich 6.7% dividend yield and has a price to cash flow ratio of around 5. It has grown earnings at an average of just under 15% a year over the past five years. It is taking market share from its main competitor in Brazil and Mexico and its revenues are expected to increase over 4% this year despite its problems in Spain. Its subscriber base in Latin America is expected to hit 340 million by 2013, which is an approximate 20% increase over 2010 levels. It also recently reaffirmed its commitment to maintain its dividend in 2012. Finally, Telefonica is trading at the bottom of its five year range measured by P/E, P/S, and P/CF due to problems in its home market of Spain. TEF is selling at a little over $24 a share. Deutsche Bank has a $31 price target, S&P is at $30 and Jefferies is at $27.

Disclosure: I am long TEF.