Can Mobile Telesystems (MBT) Survive the Ruble’s Demise?

by Ryan Fitzwater, Director of Research, The Oxford Club

Shares of Russian telecom giant Mobile Telesystems (NYSE: MBT) have plummeted over the last three months thanks the weakening of the Russian ruble.

As you can see in the chart below, Mobile Telesystems is down over 63% in the last three months. At the same time, the U.S. dollar has strengthened to more than 67 rubles this week, an all-time high.

The drop in value versus the U.S. dollar means the ruble has surpassed the Ukrainian hryvnia as the worst-performing currency of 2014. Time to break out the vodka and celebrate.

The ruble can thank plunging oil prices for its demise. The Russian economy is tied directly to oil prices, and as the price of oil tanks so do Russian stocks. As you can see in the chart below, the Market Vectors Russia ETF (NYSE: RSX) is moving in lockstep with oil prices.

The biggest concern surrounding Russian stocks, like Mobile Telesystems, is their ability to pay down dollar-dominated debt. As the price of ruble decreases versus the dollar, the cost of paying dollar-dominated debt increases, and the threat of default increases with it. As a result, investors have hit the panic button and fled Russian stocks.

The Russian central bank took a big step yesterday to try to curb the ruble’s demise. The bank said it would raise its key interest rate to 17% from 10.5%. This represents the biggest interest rate hike since 1998. Back then, Russian interest rates rocketed above 100% and the government defaulted on its debt. We are clearly not there yet, but concern is spreading. And many analysts are wondering how long the Russian economy can endure these high rates.

Fear Over Meeting Debt Obligations

If the ruble continues its historic plunge, debt-heavy Russian companies will struggle to meet their obligations. And that is why the Russian stock market has seen a major sell-off since oil prices have traded lower.

As a result, Mobile Telesystems has taken it on the chin. While the company is one of the larger Russian-based stocks, it has more than $7.5 billion in debt on its balance sheet. That debt burden will continue to grow if the ruble continue to lose it value versus the greenback.

Is Mobile Telesystems Undervalued?

Just as some investors might be waiting for oil prices to bottom out to pick up shares of oil stocks at bargain-bin prices, Russian stocks, like Mobile Telesystems, might also be on their shopping list. But it would be wise to get a better picture of the company’s financial health before taking the plunge.

Let's run Mobile Telesystems through our Investment U Fundamental Factor Test and see what type of rating it gets based on its financial standing today.

Earnings-per-Share (EPS) Growth: In the most recent quarter, Mobile Telesystems saw negative EPS growth of 11.16%. And will be hard to grow EPS next quarter if the ruble continues to suffer.

Price-to-Earnings (P/E): Since the Mobile Telesystems has seen a massive drop in share price over the last few months, its P/E ratio has come all the way down to 6.46. The industry is averaging more than 40.50. This makes the company very attractive on an earnings basis, but we have more metrics to check out.

Debt-to-Equity : Mobile Telesystems debt to equity ratio of 141.03% is ever-so-slightly above the industry average of 140.11%. But it is currently at an extreme disadvantage to other telecom companies that operate outside of Russia. As I already mentioned, a weakened ruble increases its debt burden even if Mobile Telesystems is not officially taking on new debt. Its old outstanding debt becomes harder to pay.

Free Cash Flow per Share Growth : In the last quarter, Mobile Telesystems saw free cash flow drop 16.67% per share. And positive free cash flow will be harder to achieve if its debt burden continues to expand.

Profit Margins : At the moment, Mobile Telesystem’s profit margins are a healthy 14.99%, well above the industry average of 8.66%. Always nice to see.

Return on Equity : And Mobile Telesystems closes out the last metric very strong as well. Its ROE of 49.11% is over three times larger than its peer average of 49.11%. But ROE and profit margins of this level will be hard to sustain if the ruble stays at its current level versus the dollar, especially if it advances even lower.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

C: Hold (Hits just three key metrics)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That’s why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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