5 Undervalued Foreign Companies Primed For A Recovery

Includes: BFR, GA, GFA, MTL, SKM
by: Kevin Quon

With the U.S. stock market well on its way towards recovery, treading around its 52-week highs, investors looking for the rewards of undervalued potential might do well to venture their search abroad. Not all international markets have experienced the bullish recovery that appears to be in full-swing in America. More importantly, many regions continue to offer opportunities in solid companies trading near to or around their historical lows.

For such investors looking to invest internationally without the additional hassles of trading on the foreign exchanges themselves, American depository receipts (ADRs) offer convenient access to companies abroad. ADRs bypass the disadvantages of cross-border and cross-currency transactions by offering a tradable security that operates on the U.S.-domiciled exchanges. As this access to the American markets often requires greater demand for the underlying company, ADR's inherently tend to be reserved for companies that have become reputable in their fields as leaders operating in a particular region of influence.

Yet despite the often solid foundation of the underlying companies, many ADRs continue to trade at all-time lows. The following companies are shown side by side with their market capitalization, their forward price-to-earnings ratio, their price-to-book ratio, and their corresponding region. All values are taken as of February 13, 2012.

Company Name Market Capitalization Forward P/E Price/Book Region
Giant Interactive (NYSE:GA) $1.02 B 5.76 2.80 China
BBVA Banco Frances (NYSE:BFR) $1.09 B 4.92 1.40 Argentina
Mechel OAO (NYSE:MTL) $4.67 B 4.73 0.94 Russia
SK Telecom (NYSE:SKM) $8.60 B 7.29 0.82 South Korea
Gafisa (NYSE:GFA) $1.30 B 9.54 0.56 Brazil

Giant Interactive is one of the largest online game developers in China with respect to market share. As an operator of 9 massively multiplayer online (MMO) games, with an emphasis on role playing, the company is a leader in the online gaming market in a country where such games carry a higher social capital. Using a strategy similar to the business model carried out by Zynga (NASDAQ:ZNGA), the company makes the bulk of its revenues through in-game sales via its "free-to-play" environments.

By selling game point cards in retail stores which can be used for virtual goods, Giant Interactive is able to carry a sizeable 52% profit margin. Yet despite a similar business model to Zynga in the fastest growing internet population in the world, Giant Interactive's forward P/E ratio of 5.76 is dwarfed by the heavy anticipation of Zynga's earnings growth as reflected in its forward P/E of 61. Despite its similarities, Giant Interactive has steadily paid out an annual dividend, but does continue to operate in a highly competitive market.

BBVA Banco Frances is a provider of financial services to small- and medium-sized businesses along with retail individuals in Argentina. Having taken a significant hit to its share price over the past year due to results that failed to meet expectations, the company now trades at levels that support an expected dividend yield of 17.7%. As a company founded in 1886, the company has a proven history of success in the region. As the company appears to have found some support in the range of $5/share - $6/share, the low multiple placed on the company's earnings suggests an aggressive discount to a more fair valuation.

Mechel OAO stands as one of the largest mining and steel companies throughout the Russian Federation. The company operates through its four segments of mining, steel, ferroalloy, and power, and is located predominantly in Eastern Europe and the Russian Federation. As a vertically integrated steel and mining company, the company openly competes against industry giant Arcelor Mittal (NYSE:MT), which also has a much larger presence in Europe in particular. As fears of a lasting European recession continue, steel companies have taken a particularly hard hit with companies like Arcelor Mittal and Mechel having 52-week changes of 39% and 64.5% respectively. Nevertheless, as the European Financial Crisis begins to seemingly wane, one begins to wonder how long the steel industry can remain discounted before a more fair valuation.

SK Telecom is a major South Korean-based wireless communication service provider. Serving more than 24 million subscribers with about half of the local mobile market share, SK Telecom is one of the largest telecom companies in the region. Having fallen over 20% in the past year alone due to mobile tariff cuts and the rise of new type of business models, the company's shares currently trade near Great Recession lows. Yet through the acquisition of Hynix Semiconductor announced late last year, the company looks to expand its competitiveness and profitability in the mobile telecommunications alongside its synergistic development of its non-telecom subsidiaries. The company trades under a low earnings multiple under 8, and is currently priced at a valuation lower than its book value. SK Telecom has continued to sport an increasing dividend yield year over year that currently resides around 7% annually.

Gafisa is a rapidly developing residential homebuilder operating in Brazil. Based in Sao Paulo, the company is well positioned to exploit the explosive growth of the developing country. Hurt as the housing slowdown was felt around the world, the Brazilian market faired no better in light of deteriorating economic conditions. Yet as the government begins to take steps in lowering existing interest rates, Gafisa stands ready to capitalize on the increasing residential development that is sure to take place. Having fallen over 52% in the past year, the company's shares now trade at a near 60% of stated book value, despite ongoing positive earnings. Missed expectations and market uncertainty have played a large part in the deep discount found for this Brazilian company.

Disclosure: I am long MT, GFA.

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