Why Did Bear Stearns Downgrade Vimpelcom?

| About: VimpelCom (VIP)

Just a few days after Vimpelcom (NYSE:VIP) announced they are setting up over $1 billion of telecom ventures in Vietnam – which happens to be one of the hottest markets in the east/central Asian region- Bear Stearns Analyst Alex Kuznetsov comes out and downgrades them from outperform to peer perform.

According to Kuznetsov, "[Vimpelcom] is likely to benefit from its expansion into the Vietnamese Market…however there is low visibility into Vimpel Communication's prospects". He goes onto state that, "the downgrade was based off valuation".

With all due respect, this downgrade does not seem to have much validity and I am very skeptical of its merit (of course this is just my humble opinion).

Generally, most businesses in the Russian, Central Asian and the emerging East Asian countries are not as visible as lets say American or European countries. Of course you have fraud in every country, but there is always an inherent risk in emerging markets. So if you are investing telecom companies such as VIP, Mobile TeleSystems OJSC (NYSE:MBT), Rostelekom OAO (ROS), China Mobile (NYSE:CHL) or China Unicom (NYSE:CHU) you should already be aware of that risk.

VIP has blown earnings out of the water pretty consistently and should have an EPS in the 1.25-1.35 range by years end.

Q1 .25 Beat Estimates by .02 and an increase of 80% over same qtr 06

Q2 .35 Beat Estimates by .02 and an increase of 82% over same qtr 06

Q3 .35 Estimated

Q3 .35 Estimated

Total 1.30 EPS x current p/e of 25 = $32.50

Currently VIP is around $27.00, meaning you can very well see roughly 20 more percent to the upside. Let's not forget that there is a very good chance we may see Q3 and Q4 numbers come in even better than expected due to the expansive growth in the region. 20% might even be a conservative number.

Another company that seems relatively under priced and will also give you more exposure to the region is Mobile TeleSystems. This is yet another powerhouse company in the same region. MBT is trading a little cheaper than VIP but does not have exposure to the Vietnamese marketplace as of yet. VIP acquired the second largest telecom company in Armenia, and MBT acquired the first largest. They are both regional players and I think by owning shares in both companies you will make sure to gain on the overall growth of telecom in the Central Asian region.

The one edge I feel VIP has over its peers, which institutes them as a peer outperform in my book, is the positioning it has in Vietnam. If you exclude that factor, then I would place it as a hold and increase my investment in MBT because it does seem cheaper priced yet with very similar fundamental characteristics.