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Turkcell - Top Pick For 2012
Posted by: Charles Sizemore (IP Logged)
Date: December 23, 2011 10:06AM

Before falling to the Turks in 1453, Constantinople was known as the Queen of Cities across Europe and the Middle East. No other city in the world could match its culture, sophistication and economic development. The city sat at the intersection of the Mediterranean and the Black Sea, the West and the East, Europe and Asia. It was the axis around which the known world spun.

Modern Istanbul lacks the economic clout of a New York, London, or Hong Kong—for now. But as it did in its former days of grandeur, Turkey finds itself at the center of several very powerful forces. It is the bridge between a wealthy but economically distressed Europe and a poor but growing Middle East. It is a European country with a customs agreement with the European Union; but it is also an emerging economic and political leader in the Islamic world. And while much of the Islamic world—and non-Muslim developing countries like Russia and China—is still struggling through the unstable transition from autocracy to democracy, Turkey is a good 20 years ahead of most of the pack.

The “BRICS” of Brazil, Russia, India and China may get most of the press, but Turkey has one of the brightest futures among emerging market contenders. Turkey has a younger population than any of the BRICS save India, yet fertility rates have recently fallen to Western levels; this puts the country in a demographic sweet spot for falling inflation and rising real consumer spending growth for decades to come.

Of course, the downside to being at the crossroads of Europe and the Middle East is that Turkey finds itself sandwiched between the two most problematic regions of the world. Europe is struggling to contain its sovereign debt crisis, and the Middle East has been wracked by social revolution and the threat of war against Iran.

Not surprisingly, Turkish stocks have taken a beating. The MSCI Turkey Index is down nearly 50 percent since October of last year.

If you believe, as I do, that Turkey has one of the brightest futures of any country on the planet, then the crises on Turkey’s borders should be viewed as a phenomenal opportunity to buy shares of some of Turkey’s finest companies. And my choice for 2012 is mobile phone operator Turkcell Iletisim Hizmetleri AS (NYSE: TKC).

Figure 1: Turkcell (NYSE: TKC)

It’s been a rough year for Turkcell shareholders. Actually, it’s been a rough several years. The share price is barely a third of its pre-crisis level, and earlier this year it came close to falling below its 2008 meltdown lows. Investors fleeing the volatility of Europe and the Middle East have had little use for a Turkish bluechip like Turkcell.

Their loss is our gain. There is no object more essential to life in the modern world than the mobile phone, and Turkcell is the dominant wireless carrier in Turkey with a 54 percent market share. And while mobile phones are ubiquitous in Turkey, the overall market is far from saturated. Market penetration is at about 2/3 of the European average. And smart phones—with their lucrative data plans—represent only 10% of Turkish cell phone users.

Turkey, while the biggest, is far from Turkcell’s only market. The company is also a major player across Eastern Europe and the Middle East, and Turkcell is the market leader in five of the nine countries in which it operates. The key to take away from this is that telephony is still a growth industry in most emerging markets, and Turkcell is a fine company in a great position to profit from that growth.

In Turkcell, we have:

  • A world-class company with a dominant market position in a dynamic emerging economy
  • A company that sells service that has become a basic necessity for both consumers and businesses—meaning that it is recession resistant
  • Great opportunity for growth
  • A direct play on the Turkish consumer
Turkcell is also a conservatively financed company. The company has no net debt, and a third of its balance sheet is cold, hard cash. Turkcell has $3.73 per share in cash; not bad considering the stock price is currently less than $12.

Skeptical investors might well be wondering: What’s the catch?

If investing were this simple, it wouldn’t be fun.

Most good value stocks have a few black marks that have caused them to fall out of favor with investors, and Turkcell is no exception.Turkcell’s board of directors has had an on-again, off-again power struggle between two shareholder groups that reached a boiling point earlier in 2011. The company missed its dividend payment, not because it couldn’t afford it (it most assuredly could) but because the board couldn’t stop bickering long enough to approve it. Markets hate uncertainty and the uncertainty plaguing this stock explains a fair bit of its underperformance of late.

The board situation will get fixed soon. In the meantime, life goes on and the company continues to grow and prosper. When the dividend payment is resumed, I expect it to be in the ballpark of 5 percent. In the meantime, investors can buy a piece of one of the finest emerging market telecom companies in existence trading for just 9 times expected 2012 earnings.

Action to take: Buy shares of Turkcell and plan to hold for the duration of 2012.

Stocks Discussed: TKC,
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