Tele Norte Primed for a Major Breakout

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, just announced stellar quarterly results with EPS growth north of 40%. Even though some analysts predict the US dollar to appreciate vis-a-vis many currencies, the buoyant Brazilian economy should allow the Brazillian real to continue its upward trend and thus allow Brazilian companies to benefit from positive FX headwinds.

There have recently been some concerns with regards to TNE's pending acquisition of Brasil Telecom Participacoes (BRP); some analysts have contended the move to have a dilutive impact and to reduce the cash flow of the firm. That was precisely the reasoning behind S&P's recent downgrade of the stock. Consequently, TNE is currently trading 20% away from its highs.

I tend to strongly disagree with the doubters of this company. The BRP acquisition, while appearing to be dilutive, will allow Tele Norte (TNE) to become the major telecom provider in Brazil and allow it to compete on an equal footing with bellwethers such as America Movil (AMX). Furthermore, TNE will benefit from significant cost synergies that result from a larger customer base and more diversified services.

Since it already trades at a 20-30% discount (50% to AMX) to its peers, namely at less than 8 times trailing earnings coupled with a 25% growth rate, a doomsday scenario has already been more than priced into the stock. BRP just announced a fantastic quarter with 50%+ EPS growth; therefore, what may seem like an expensive acquisition at present will be considered a steal in retrospect a few years from now.

The stock is trading just below its 50 day moving average; I expect TNE to handily break through it and trade to new highs as short term worries start to gradually dissipate. I strongly suggest getting long this company as a double in the next 12 months is not inconceivable.

Disclosure: Author has a long position in TNE

Comments

[MistaWhite:]

I actually picked up 200 shares yesterday. I am a small 25 year old investor. I look for some upside.

2008 May 07 12:22 PM

[globalmacro:]

What percentage of their revenue comes from mobile vs fixed line? Where do you see growth coming from in the next 5 years? What are the advantages over VIV? I'm not convinced but I've never followed this issue and I'm not familiar with their competitive advantages (if any).

2008 May 07 05:58 PM

[rexquondamr...:]

It amazes me that Yahoo even uses SA content. The articles are poorly written, poorly researched, ridden with grammatical errors and the charts are often mislabeled. It reads and looks as though it were an 8th grade class project. Even worse, the vast majority of 'writers' are simply using this as a vehicle to try to pump up the value of shares they own.

2008 May 08 01:50 AM

[Great Wazoo:]

I find the article interesting, and would rather read thoughts from real investors than some I see on Motely Fool written by "grammatically correct writers" who have never invested a dollar in their life.
Globalmacro - a good percentage of their revenue comes from fixed line, and this revenue is declining. They are spending a lot of money to ramp-up their mobile services, and this should help them a lot. VIV may have better mobile services, but they also aren't making much money.

2008 May 08 12:52 PM

[Stockpicker...:]

Way to go Wazoo, the rex guy should find constructive ideas rather than criticizing other people. SA is absolutely great since it allows investors to share their ideas; others have the power to chose whether they agree or disagree.

2008 May 09 11:29 AM

[SHOOTER94:]

I found this stock through Barron's Marketgrader system which provides very informed comparative analysis. They rate this the top company in Integrated Telecommunications Services with an overall rating under their system of 82.3. The next two companies in their ratings are VIP (78.8) and TMX (77.7). Sometimes their higher ratings mean nothing to the stock price because the fundies do not necessarily get people to know about or like the stock. But this one might have legs. Go for it!

2008 May 10 01:30 PM

[kameleonkai:]

I'am a small private investor from The Netherlands.This stock has been named one of the favorites for the year 2008 by IEX.nl for the NYSE.This was written in dec. 2007,so,after a little research myself I bought a few stocks at a price little under 20$.Sold around 24$ and got even interest.About 20% in a few months,not bad.But,looking for a stock that will make me happy the next months I'am returning to this one.
They say to get out in may but to remember to be back in september,but I'am not going to wait so long I think.

2008 May 12 08:15 AM

[crimfunk:]

well we bounced down at the 50dma, betting that we pullback a bit for a better entry point

2008 May 20 01:43 PM