International Wireless Companies Poised For Growth

Keeping an ear toward the telecom industry these days (as I was unable to resist a bad pun), we sat down recently with Zacks senior telecom analyst David Weissman, CFA to see how earnings season is progressing for companies under his coverage.

How have telecom companies in your coverage been performing this earnings season thus far?

We continue to see mixed performance since the start of 2008 for both telecom services companies and equipment manufacturers providing infrastructure and network upgrades. General economic weakness in the United States, and elsewhere in the world, has transcended to the telecom industry in terms of lower stock valuations and, in some cases, to companies reporting lackluster financial performance.

Looking at the overall industry, we have not seen any significant changes in capital spending by carriers, in comparison to last year, and this has made it difficult for several telecom equipment companies to meet or exceed growth forecasts. Several telecom services and equipment companies have reported declining revenues and earnings, but we believe that the industry was prepared for such events and we are weighting our projections to the side of improved results moving forward.

What sub-sector of the telecom group is poised to do best in the current environment?

We continue to see telecom services strength in emerging markets, and it is evident that international wireless carriers continue to outperform. Market valuations in this segment are higher, ranging from China Mobile (CHT), up 80% since last year, Vimpelcom (VIP) 61%, Millicom International (MICC) 44%, Mobile Telesystems (MBT) 35%, to Vodafone (VOD) up 11% for the year. Stock performance apparently correlated quite well with the company's respective geographical focus, where the best performers had the largest untapped wireless markets.

Which are your top Buy recommendations at this time?

While many of the companies we just mentioned represent sustainable business prospects, some of these companies' stock prices may already reflect fair value in relation to growth prospects. We are currently investigating geographies and telecom services that may be overlooked or out of sync with general consensus forecasts.

For example, we just raised our rating from Hold to Buy for Time Warner Telecom (TWTC), a U.S.-based carrier focused on business telephony, as the company grew revenue 33% last year and started 2008 by beating 1st quarter consensus earnings estimates. Their diversified business customer base spans multiple industries, such as finance and banking, technology, medical and education, and this provides a revenue stablizer should one or move business segments experience opportunity weakness over a reporting period.

Businesses and prospects continue to consider the needs of more bandwidth for integrated communications and weigh the options against restricted IT spending budgets. Time Warner Telecom's direct fiber connectivity to buildings, with its IP transport infrastructure, evidently is reaching more business customers as a cost effective approach to bundle services. We have a $25 valuation target for the company.

We also recently upgraded our rating for NTT DoCoMo (DCM) based on an extremely low and favorable churn (customer switching) rate at 0.8%, one of the lowest levels we have encountered in the global market. Financial metrics look intriguing as the company's ADS shares are trading at 13x 2008 earnings and approximately 4.9x EV/EBITDA.

DCM has innovated and attractive calling capabilities, including multiple/simultaneous phone numbers that a user can enable for a single cellular handset. We have an $18 valuation target for DoCoMo based on approximately 15x 2008 earnings estimates.

David Weissman, CFA is a senior analyst covering the telecommunications industry for Zacks Equity Research.