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The Best Bargain in Wireless Communications

- By Jonathan Poland

SK Telecom (SKM) is South Korea's largest wireless communications company, serving over 30 million customers. It also owns and operates SK Broadband, which has 5.5 million internet users and 4.6 million television customers, and has a 20% stake in SK Hynix, the world's fifth-largest semiconductor company.

Korea is typically on the cutting edge in telecom. The country boasts more than 90% penetration rate for high speed internet users, with baseline speeds of 100 megabytes per second standard over 12 years ago, and early next year SK Telecom is expected to go live with 5G wireless, giving users data speeds over 1 gigabyte per second, comparable to most fiber optic lines in the U.S.


Currently, the company generates over $2.6 billion in net profit on $15.4 billion in sales. It has $2.1 billion in cash and just $4 billion in long-term debt. SK Telecom has done a great job remaining conservatively financed and investing early in the next generation of tech. By comparison, Verizon, the leader in fiber optics here in America, has just $1.75 billion in cash and over $89 billion in long-term debt, but does produce a higher net margin.

One setback for SK Telecom came from government tariff cuts placed last September, which had adverse effects on its core business, driving operating profit down 20% during the second quarter. This was offset by growth in broadband-based TV (IPTV) and Internet of Things (IOT) revenue.

That said, over the last decade, SK Telecom's net margins, return on equity and return on invested capital have all improved. In fact, the company has more than doubled its net income in that time on marginally higher sales, squeezing even more out of its business thanks to improved margins.

Domestically, SK Telecom has roughly 50% of the wireless market share and Korea is a country where data usage is still surging, up 20% in 2017 alone. The handset replacement cycle is still strong as well, with users switching every two to three years on average. This should keep the revenue and profit rolling in for quite some time.

It's also invested in NAND memory chips with SK Hynix. SK Telecom owns a 20.6% stake in the company as it begins to mass produce fifth-generation 96-layer 3D NAND flash memory, a move that all major manufacturers from Micron to Samsung are making as 3D NAND is serving a full range of end markets from consumer, mobile, computing and data centers. It's big.

In an industry of constant innovation, prices will likely rise for users over time, either through higher priced devices or recurring bills for faster speeds and better services. AI will also play a big part in reducing costs for service providers, helping improve user experiences organically.

With the stock priced at $25.81, some analysts have the forward earnings as high as $11 per share, but even if the earnings come in at close to the current level of $4.20, that puts the multiple 60% lower than its historical average. For South Korea's largest telecom provider to trade at less than 10x earnings (industry average) makes the stock a massive bargain right now.

Disclosure: I am not long/short any stock mentioned in this article.

This article first appeared on GuruFocus.