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Risk-Reward With Telefonica Brasil After 30% Rise

- By Jonathan Poland

If you missed the bottom last year when stock in Telefonica Brasil (VIV) was trading below $10 a share, don't worry. There's still plenty of upside potential left for new investors.

Brazil has struggled since hosting the World Cup in 2014. Its currency valuation has been cut in half against the U.S. dollar, and there has been political unrest for close to five years. Now, with a new, pro-business and anti-corruption president, that could change. Telefonica Brasil (VIV) is in the perfect spot.

The company reported net earnings in the forth quarter of 1.48 billion real on rising revenue of 11.1 billion real. Based on current exchange rates, that equates to roughly $400 million in profit on $3 billion in sales, and that's just one quarter. If the Brazilian real is currently 27 cents on the dollar and if that rate rises back to 2014 levels of 45 cents, then all Brazilian stocks will get a major boost.

When Brazilian President Jair Messias Bolsonaro was sworn in in January, he issued decrees that Latin America's largest economy would be free of "socialism and political correctness" and forge closer political ties with the U.S. These moves will help its currency, if successful. Aside from a rise in currency values, the Brazilian company continues to pay an excellent dividend, an 8% yield (U.S.) and is expected to pay out over $1.00 in 2019.

Telefonica Brasil has a cost advantage because it operates a high-quality data network. The wireless market in Brazil is moving toward postpaid subscribership, and Telefonica has over 40 million (55%) of its wireless customers on contracts, which makes it more resilient long term. This is a big reason why the company has a 20% profit margin and generates 12% return on equity -- an enviable position even by U.S. telecom standards.

If you want a trade on the global telecom industry, the company is 73.6% owned by Spanish conglomerate Telefonica (TEF), which is the seventh-largest telephone company in the world with $74.4 billion in annual revenue, pays a 5% dividend and is priced fairly at 13x earnings. But, the new government administration in Brazil, coupled with Telefonica Brasil's dominant position in (arguably) the most important sector, makes it a better trade. Then factor in a juicy dividend and further room for the stock to run, and Telefonica Brasil is a buy.

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

This article first appeared on GuruFocus.