Friday March 16, 2012
by John Buckingham, editor The Prudent Speculator
We follow an approach to investing that focuses on broadly diversified investments in undervalued stocks for their long-term appreciation potential.
Two of our latest featured stock ideas are in the global telecom sector: LM Ericsson (ERIC) and Nippon Telegraph & Telephone (NTT).
LM Ericsson, a Swedish company, is a leading international supplier of network equipment and related services to telecom operators for the handling and transmission of voice and data.
We believe Ericsson is in a dominant position to take advantage of the increasing popularity of smartphones and their bandwidth-hungry applications, despite the highly competitive nature of the industry.
Lumpy as wireless operator spending is (given the uncertain timing of network project updates), the company’s service business should steadily grow and provide a catalyst for more equipment sales.
Emerging markets such as China and India are also moving from coverage build-out to capacity increases as data volume and customer counts grow.
Concerns about compressed margins for some developed market network projects are largely offset, we believe, by Ericsson’s solid balance sheet, strong cash flows and attractive 2.9% yield.
Its P/E, price-to-tangible book, price-to-sales and EV/EBITDA ratios are all at material discounts to five-year averages.
Nippon Telegraph & Telephone is Japan’s largest comprehensive telecommunications company with top market share in both fixed-line and mobile telecom businesses. NTT is currently organized under a holding company structure.
Companies within the group, include: regional telecom firms NTT East and NTT West, long distance and international telecom entity NTT Communications, mobile telecom power NTT DoCoMo and IT service player NTT Data.
NTT dominates the Japanese fiber-optic market and also owns 63% of DoCoMo, the largest Japanese wireless provider with about half of the country’s market share. The firm is still working to rebuild following the tragic earthquake last year.
While recovery is still the near-term focus, international expansion is management’s vision for the long run. The threat of increased government regulation and amplified competition is offset, we believe, by the firm’s large scale and cash flow.
The firm's financial condition affords it the opportunity to invest in its business while also repurchasing shares and increasing dividends.
The shares currently offer a 3.2% dividend yield and trade at a relatively meaningful discount to most historical valuation metrics.
Learn more about this financial newsletter at John Buckingham's The Prudent Speculator.