Seeking Alpha
About this author:

How many global telecom stocks are trading at below 8 times trailing earnings while growing EPS at 25%+ per annum? After performing a detailed equity research on a multitude of global telecom names, I reached the conclusion that Tele Norte (TNE) has by far the most upside potential while still being relatively undiscovered.

The company, which mainly operates in Northern Brazil, has been a prime benefactor of the secular growth of the Brazilian consumer. It recently announced the acquisition of Brasil Telecom Participacoes (BRP), which just announced that its earnings grew by 50%, mainly driven by strong growth in its wireless business. The BRP acquisition was virtually a steal in that it not only allows TNE to gain a stronger national foothold but also to capitalize on synergies that should allow the firm to substantially reduce costs and thus drive profitability.

Did I mention TNE was trading at below 8 times trailing earnings? If the firm's EPS growth rates in any way mirror those of acquired BRP, then the forward PE could even be significantly lower. The icing on the cake is when the BRP acquisition becomes accretive which, according to management, should occur in the second quarter of 2009.

All in all, both from a fundamental and technical viewpoint TNE is grossly undervalued and trading at a 20% discount to its peers (on avg). My price target for this stock is $40 by year end, namely once investors start realizing the synergies of the BRP acquisition and their added value to EPS growth.

Disclosure: Author has a long position in TNE

Print this article with comments

This article has 10 comments:

  •  
    Pretty amazing when you consider AMX has a P/E of 19.3 AFTER a 13% drop this morning. Everything else being equal, that would make TNE worth $50 a share.
    2008 Apr 25 10:47 AM | Link | Reply
  •  
    Looks like this deal gets done today! In from $12 and added more on the news. blogs.wsj.com/deals/20...
    The Soap Opera of A Brazilian Telecom Takeover
    2008 Apr 25 01:50 PM | Link | Reply
  •  
    trading halted at 2:34PM glad I added another chunk
    2008 Apr 25 02:52 PM | Link | Reply
  •  
    I added more too, Why did the trading stop?
    2008 Apr 26 09:24 AM | Link | Reply
  •  
    Could have been huge buys comming in or some type of ADR swap. Brazil was down afterhours, esp BRP -9%. Buying TNE on weakness
    2008 Apr 26 06:20 PM | Link | Reply
  •  
    So that Bank is dumpimg shares.
    2008 Apr 28 12:19 PM | Link | Reply
  •  
    Considering the drop vol is pretty low, added sub $23
    2008 Apr 28 12:22 PM | Link | Reply
  •  
    Wow! Where did my angels go. I decided to invest in this Grossly undervalued stock monday morning........ thinkin' I would start playing it safe with the tumultuous market. I could not have timed it worst. Didn't even bother to put stops on it yet. Lost the most I have ever have in one day, it was like 1929 again, do they even have a word for a undervalued stock that is more then "Grossly" undervalued .....apparently it was not as grossly undervalued as the rest of the investing community thought. It seemed like a great idea. 7.5 PE for a company growing fast, that was 15 % below peak value, article made sense, didn't realize a buyout was going on. Can anybody shed some light.

    Well does anybody have some advice for me here, has the whole gamed changed now with this buyout..... Is this not a good thing going forward, I am totally lost.

    People tell me good things happen to good people, and bad things happen to bad people..... Kharma you know. I feel like I must be a very bad person.......Actually bad things happen to people who don't know what the hell they are doing, and I guess that is me, this investing is kicking my butt.
    2008 Apr 29 12:36 AM | Link | Reply
  •  
    I didn't expect such a big drop either. Looking at the PE alone, it really looked like a bargain, but this merger and talk about new shares just made this measure less useful. What I am worried most is that, apart from the high initial cost, the new aquisition will bring also additional costs with little and shrinking revenue. BRP has fixed lines, public phones, etc., which are mostly things of the past and expensive to maintain. Added some below $23 but still feel further drop is likely and the future of this elephant in a cage with tigers uncertain. Does anyone know their plans with the fixed lines and why they were willing to pay so much? Megalomania?
    2008 Apr 29 05:39 AM | Link | Reply
  •  
    They were willing to pay so much for BRP because it allows them to become the major player in Brazil and thus compete on an equal footing with the likes of America Movil (AMX). The synergies from this deal far outway the premium it had to pay. BRP's earnings grew 50% year over year so what seems like an expensive deal right now will become a steal in retrospect a few years from now.
    2008 May 06 02:49 PM | Link | Reply