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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Risk Reward With Telecom Argentina

A foreign investment opportunity that yields 11.6% and trades at a 52-week low

July 25, 2018 | About:

Telecom Argentina (NYSE:TEO) offers fixed-line and mobile phone services along with internet and other telecommunication services to the whole city of Buenos Aires, which is home to roughly 3 million people. Mobile is the company's biggest revenue generator, seeing solid growth with a 61% increase in 4G subscribers since first quarter 2017.

Fresh off FIFA World Cup disappointment, the Argentine economy is now in focus. Venezuela is, by far, the worst economy in all of Latin America thanks to socialist rule and money supply expansion, but Argentina is not that far behind after Cristina Fernandez de Kirchner’s administration's struggle with corruption and gross budgetary mismanagement.

The new president, pro-business leader Mauricio Macri, is trying to fix the serious structural economic problems he inherited that have created such an incredibly horrific currency value compared to the U.S. dollar. It’s going to be an uphill battle as just last month Macri sparked protests by reaching out to the International Monetary Fund (IMF) for an emergency loan of $50 billion. This is adding political risks to the due dilligence of companies that want to do business in Argentina.

When the country’s former president came to office in 2007, the Argentine peso (ARS) was 0.33 to the U.S. dollar. Today it’s 0.036. So, it takes almost 28 pesos to get a U.S. dollar. This is a big deal to companies that operate inside the country, even if the firm offers services that are valuable and necessary. This has happened multiple times before in Argentina. In the late 1960s it took 350 pesos to buy one dollar and by May 1983, it took almost 100,000 pesos to get one dollar.

Telecom Argentina has grown across all financial metrics. In the last 12 months the company booked 9.2 billion pesos in profit on 86 billion pesos in sales, up from 961 and 10 billion, pesos respectively. In dollar terms, profit is flat and sales are down. On one hand, the new administration will need time to get the economy going again, but when it comes to telecom services in the country, prices are pretty outrageous.

In May, the company reported that it had 19.5 million mobile users that pay 160 pesos per month, 3.5 million cable TV users that pay 636.50 pesos per month and 4.1 million broadband users paying 577.60 pesos per month. It’s pretty clear Argentina needs a lot of help to get its inflation under control because while in dollar terms those aren’t big numbers, the average per capita income is roughly $5,900 USD, which puts the cost of telecom at roughly 10% of their annual wage, far less than here in the U.S.

With the new president in office, the hope is that as the country’s economy strengthens, the currency can as well, and that costs will naturally come down as a result. If that happens, more people will be able to afford elevated services and because the currency would be more valuable, Telecom Argentina wouldn’t need to grow at all in order to become more valuable.

If the Argentine peso was just $0.10 to the U.S. dollar, then Telecom Argentina’s annual profit would triple.

Bottom line: I don’t think the currency can remain this low forever with the new government in office, despite the short-term problems it will face.

Disclosure: I am not long/short Telecom Argentina.

About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website


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