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Dollar-Cost Average on Telecom Argentina

- By Jonathan Poland

Since I first analyzed Telecom Argentina SA (TEO) last July, both the company and the country it operates in have been beaten up considerably. The company's stock price and the Argentine peso were cut in half over the last year.

Now for the good news, which is to say that the bad news is pretty much baked into the stock at this point. In March, the company reported solid numbers, with net income of 5.5 billion Argentine pesos on sales of 168 billion pesos. In dollar terms, that's $132 million in profit on $4 billion in sales. On the earnings call, Chief Financial Officer Gabriel Blasi said prices were up across the board with the following customer breakdown.

  • Fixed Voice: 3.5 million customers paying 219 pesos per month.
  • Broadband: 4.1 million customers paying 623 pesos per month.
  • Pay TV: 3.5 million customers paying 696 pesos per month.
  • Mobile: 18.6 million customers paying 174 pesos per month.

I continue to be a believer in Argentina's economic rebound potential. Just 10 years ago, it took four pesos to exchange for a dollar, now it takes 42. Yet, the economic output remains on a long-term growth trajectory.

I'm not the only one who is bullish on the stock. JPMorgan expects Telecom Argentina to be the "most benefited stock" by MSCI's upgrade of Argentina to emerging-market status, with 10 stocks potentially being placed on the Argentina Standard Index. Argentine equity investors were burned last year by the collapse in stocks when measured in U.S. dollars, and are likely holding on to the hope that stocks will rally once the index upgrade is effective in May.

Like Empresa Distribuidora (EDN) with electricity, Telecom Argentina will continue to be the backbone of communications and entertainment within the country. Any revaluation of the peso will likely result in higher market capitalizations. Long term, if the peso moves back up to prior-year levels, the company could lower prices and still crush earnings in dollar terms.

Disclosure: I am not long or short TEO.

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This article first appeared on GuruFocus.