Brasil Telecom a Steal Below $35

Brasil Telecom S.A. (BTM) has one of the best P/E ratios of any North American-traded stock. It has one of the top PEG rates. It pays a dividend of over 4%. And analysts give it a one-year target of $61.50 -- an upside of over 80% over its current stock price. I'd buy it just for those qualities.

But wait there's more: This company is also completely independent of the U.S. economy. It earns its money in a currency that is unaffected by the fall of the U.S. dollar. And its home country is a net exporter of oil and biofuels that is energy independent -- and riding the commodities super cycle.

Brasil Telecom S.A. trades for around $32 dollars on the New York Stock exchange. The company is a subsidiary of Brasil Telecom Participacoes S.A. (BRP)-- whose ADR also trades in New York for around 70 dollars. (Keep that in mind when you buy the stock. You want BTM, not BRP.)

BTM provides fixed-line telecommunications services in nine Brazilian states, including local and long distance calling services; dial-up and broadband Internet access services, and data center services to residential and corporate users. In addition, Brasil Telecom offers private telecommunication services through submarine fiber optics cables, with connection points in the United States, the Carribbean, and other South American countries.

Brazil's GDP growth may moderate to 4.8 percent this year, after increasing 5.4 percent in 2007. During the first two months of 2008, Brazilian industrial production increased 9.7 percent, after 8.7 percent in January. Growth this year comes from internal sources, such as domestic consumption, investment and public spending. Exports to the U.S. represent only 2.5 percent of GDP.

The stock price pf BTM's mother company, BRP, has been falling since Telecom Oi -- Tele Norte Leste Participacoes -- said it would pay $3.5 billion for it in a deal that would give the combined company 17 percent of Brazil's rapidly growing mobile phone market.

The company currently operates in 16 Brazilian states and may expand outside Brazil. It is expected to have 30 million customers in South America, Africa and Europe by 2013.

I don't know how BTM's stock price will be affected by the proposed takeover, but it seems quite buffered from the price fluctuations of its parent company. Buy Brasil Telecom S.A,'s ADR under the symbol BTM at prices below $35 with a 50% upside by November.

Disclosure: none

Comments

[0ldman:]

interesting and util.

2008 May 06 10:49 AM

[ali k:]

Great pick. The stock's also trading quite undervalued on technicals. I see it as a value pick up to $36 per share and a growth pick afterwards. Don't forget Brazil's crop exports help fuel growth.

2008 May 06 01:09 PM

[Cajun:]

What happens if you buy this stock, and later, the dollar gains 20%.

Wouldn't that bring your net earnings DOWN?

Cajun in New Orleans

2008 May 06 04:07 PM

[ali k:]

Well I'm not a currency expert - but this company doesn't seem to be affected by the dollar because they don't generate revenue outside of Brazil.

2008 May 06 10:47 PM

[User 172125:]

One thing that you forget to mention is the fact that brazil recently deregulated the telecommunications industry. It used to be that a tel co could just operate in a state (of which i think brazil has about 17) as of a couple of months ago this is changed and brazil is wide open. look for consolidation. If you like brazil plays check out viv (cell phone c0- reports in a few days- a cheap adr at around 7 dolla'

2008 May 07 02:10 AM

[torci:]

i dont know what you are talking about, the company will be merged into TNE, in no way there will be a doubble and i dont see which analyst has a target of 61, if so he must be drunk or the target must be one before the takeover news.

2008 May 07 04:52 AM

[Adam Thompson:]

There's some confusion floating around here. BTM and BRP are equivalent to the preferred stock of Brasil Telecom and BT Participacoes (1 BTM ADR = 3 pref shares of BT; 1 BRP ADR = 5 pref shares of BT Part). Tele Norte Leste Participacoes is acquiring all the common shares of BT and BT Part. TNLP is also making a voluntary tender offer for 1/3 of the preferred shares of BT and BT Part. The tender offer is R$30.47 for BT Part pref shares and R$23.42 for BT pref shares, currently equivalent to $91.59 for BRP and $42.24 for BTM. But since TNLP will not acquire all of the pref shares, the price could eventually go higher after the takeover. It could also fall significantly after the takeover, of course.

I don't understand Amberger's comment that BTM's stock price seems buffered from the price fluctuations of its parent company. It looks to me like the prices of BTM and BRP have been moving roughly together, at least since the beginning of the year.

Personally, I think TNE is the buy here. (This is not a recommendation, of course. Do you own research before buying anything.)

Disclosure: I have a long position in BTM for one client. I have long positions in TNE for many clients and for one family member.

2008 May 07 10:01 AM

[ali k:]

So with the takeover negotiations over - is BTM a continued legitimate hold or will it be absorbed into the parent company?

2008 May 12 02:39 PM

[Jerry Dill:]

Foreign currency is definitely a concern with this one. I will have to see what happens to the US dollar when it comes to this stock.

2008 Jun 18 02:13 PM