In an earlier article here, I argued that Mobile TeleSystems (NYSE:MBT) and Vodafone Group (NASDAQ:VOD) had significant upside. Since then, only shares of the former have taken off -- rising by 19.4% and outperforming the Dow Jones by 1,130 bps. Going forward, I continue to believe that MTS will outperform Vodafone.
From a multiples perspective, Vodafone is the cheaper of the two. It trades at a respective 12.5x and 10.2x past and forward earnings with a divined yield of 5.4%. MTS, on the other hand, trades at a respective 13.8x and 10x past and forward earnings with a dividend yield of 6.2%. Both firms are rated highly at a Street near a "strong buy" rating, but Vodafone is still preferred. In my view, overblown competitive risks in MTS have discounted the stock more.
Vodafone's core European markets are gaining momentum even amidst macro challenges. Data was up 25% in the third quarter with solid smartphone penetration. Going forward, India will be the main catalysts as the government works out regulation on 3G development. Vodafone recently had a tax victory in the country and may now IPO its Indian business. With customers indicating greater willingness to accept price hikes, margins are further likely to rise.
Consensus estimates for Vodafone's EPS forecast that it will decline by 2.7% to $2.54 in 2012 and then grow by 4.3% and 3% in the following two years. Assuming a multiple of 11.5x and a conservative 2013 EPS of $2.59, the rough intrinsic value of the stock is $29.79, implying 10% upside.
MTS has had solid delivery in controlling its cost base. Investors have been quick to mention competitive issues. Megafon is gaining ground against MTS with solid net adds in the Russian market. But just like how Rostelecom is dealing with broadband cannibalization and network growth issues, Megafon is less of risk that what the market acknowledges. Indeed, MTS will be renegotiating commissions to help mitigate churn. The new structure will be based more on ARPU and less on SIM activation.
Consensus estimates for MTS' EPS forecast that it will decline by 7.1% to $1.44 in 2011 and then grow by 17.4% and 14.8% in the following two years. Assuming a multiple of 12x and a conservative 2012 EPS of $1.63, the rough intrinsic value of the stock is $19.56, implying 15.4% upside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.