by Justin Dove, Investment U Research
Thursday, October 6, 2011
Louis Basenese, Chief Investment Strategist of Wall Street Daily, has written extensively promoting the mobile industry as a “forever growth trend.”
But despite exposure to Europe, “the majority of [Telefonica's] sales – around 60 percent – don’t even come from the Eurozone. They come from Latin American markets, which boast some of the strongest growth potential in the world,” Basenese wrote.
And in Latin America, the economy with the most potential for mobile telecom industry growth over the next decade is Brazil…
Why Brazil’s Economy is Set for Growth
At 3.5 percent, GDP growth in 2011 will be about half the rate of economic growth in 2010. But even 3.5-percent growth is better than most of the developed economies of the West. With the slowing economic growth, mobilephone subscriptions were still up 1.67 percent from July to August.
Currently the seventh-largest economy in the world according to the World Bank, there are several reasons to expect solid growth for Brazil this decade:
- Petrobras is expected to reach vast oil reserves off the coast of Brazil in the pre-salt fields. This should create jobs and export opportunities for Brazil.
- Brazil will continue to increase agricultural and mineral output, as it’s abundant in natural resources – one reason China wants to gain more access to the country.
- The Açu Superport on the coast of Rio will create a “highway to China.” The port is also expected to boost manufacturing along the coast and the economy as a whole.
- The 2014 World Cup and 2016 Summer Olympic Games will put Brazil front and center on the world’s stage. The influx of tourists and cash flow from these worldwide events should provide another boost to the growing economy. It also gives Brazil a reason to maintain growth and build a strong infrastructure to support these events.
Brazil’s Mobile Telecom Industry’s Expected Expansion
Below are projections from the Business Monitor International (BMI) Brazil Telecommunications Report Q4 2011.
According to BMI’s projections, the number of cellphone subscribers is expected to grow by 39 percent between 2010 and 2015. Further, Brazilian telecoms regulator Anatel recently predicted that mobile connections in the country should reach one billion by 2022 – more than four times the current amount.
Even more optimistic is the projection of 3G subscribers, which expands by almost 400 percent from 2010 totals as smartphone technology saturates the region.
So who benefits?
The Four Major Players of Brazil’s Mobile Sector
There are four major players in Brazil’s mobile sector.
- Vivo Participacoes S.A. (NYSE: VIV), which is controlled by Telefonica, is the leading wireless company in Brazil.
- TIM Participacoes S.A. (NYSE: TSU) is controlled by Italian wireless giant TIM. It recently overcame Claro as the number two wireless company in Brazil.
- Claro ranks third in Brazilian wireless. It’s controlled by Carlos Slim’s America Movil (NYSE: AMX).
- Oi, which is a subsidiary of the largest landline company in Brazil, Telemar Norte Leste S.A. (NYSE: TNE), is the smallest wireless player and its share has actually decreased.
The current market share for these companies, courtesy of BMI:
TIM Taking Advantage of Prepaid Plans
Since these numbers were compiled, TIM Brasil overtook Claro as second in market share. This is due to TIM’s focus on prepaid plans, which are extremely popular in Brazil – especially with the young. According to The Nielsen Company, 56 percent of Brazilian mobile phone consumers aged 15 to 24 pay their own mobile bills, so they’re careful not to incur overuse charges.
While this strategy is serving TIM well in the short term to increase market share, Claro and Vivo are shifting to change this theme to increase average revenue per user (ARPU). According to BMI, “The proportion of prepaid subscribers in the Brazilian market continues to fall.”
However, as the chart below shows, Claro is currently trailing in both market share and ARPU to TIM…
The Top Brazilian Telecom Stocks
Vivo, dominant in market share and ARPU, pays a high dividend, around 12 percent this year, and the stock has a very low beta of .48, meaning it’s less than half as volatile as the overall market.
Its P/E is relatively low for the expected growth at 10.25 and earnings per share is $2.47.
TIM Brasil is slightly cheaper than Vivo, despite less than half of the market cap. It has a lower P/E at 8.61 and higher earnings per share at $2.83. However, it pays a lower dividend than Vivo and has a beta of 1.16, meaning it’s even more volatile than the market.
American Movil (owner of Claro) is extremely large, with a market cap of $83 billion. However, with an extremely large float, the shares are cheaper and the EPS and dividends are diluted. It’s also selling at a P/E of 15.05 and the beta is 1.34. Keep in mind it also has exposure across Latin America and is based in Mexico.
Finally, Tele Norte Leste (owner of Oi) is the smallest company (with a $4-billion market cap) and stock. Its P/E is 12.31 and the EPS is only .74. Its volatility is nearly matching in the market with a beta of 1.01.
Viva La Vivo
While Telefonica controls Vivo and would be a more diversified play, Vivo stock itself offers more direct exposure to the growing Brazilian mobile market. It’s a dominant company with a seemingly undervalued stock and solid dividends.
TIM also seems undervalued and is on the rise in terms of market share and earnings. It may actually be a better growth option than Vivo, however with less stability and less dividends.
For those looking to play Brazilian mobile phone growth, these two companies could be the best options.