Foolish Forecast: Mighty Mobile TeleSystems

Is there a reason for the collapse of the Russian stock market? The country's brief, victorious war with Georgia may have had something to do with it. And Prime Minister Putin's growling at Mechel (NYSE: MTL) probably didn't help matters. To top it all off, Russia's major cell phone provider, and one of its top growth stocks -- Mobile TeleSystems (NYSE: MBT) -- has disappointed Wall Street in the past.

All politics aside, if firms like MTS can find their footing, the market should rebound. If so, it's probably a good idea to tune in and see how things are going when MTS reports Q3 earnings tomorrow morning.

What analysts say:

• Buy, sell, or waffle? Eighteen analysts follow MTS, with 17 rating it a buy, versus just one hold.
• Revenue. On average, they expect to see sales rise 24% to $2.76 billion.  
• Earnings. Yet profits are predicted to drop 16% to $1.38 per American Depositary Receipt. (Note that each ADR represents five shares of Russian common stock.)

What management says:
The biggest news of the quarter, one suspects, was October's rather ambiguous announcement of an impending alliance between MTS and its U.K. counterpart Vodafone (NYSE: VOD). Precisely how the two firms aim to cooperate, and what's really in it for MTS, remain mysteries, although this probably is not good news for MTS rival VimpelCom (NYSE: VIP). At least Vodafone's interests are clear. Judging from the numbers above, analysts still think of Russia as "growth story incarnate." You can't blame Vodafone for wanting a piece of that action.

What management does:
It's also worth pointing out that although MTS "missed estimates" in the past, this does not mean the company did poorly. Yes, gross and operating margins are on the decline, but the (literal) bottom line here is that net profitability is holding up quite nicely.

Margins	3/07	6/07	9/07	12/07	3/08	6/08
Gross	77.5%	77.6%	77.3%	75.4%	76.8%	75.2%
Operating	35.1%	35.9%	35.4%	33.2%	32%	31.5%
Net	22.1%	21.2%	22.3%	25.1%	25.1%	24.9%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
To tell the truth, the more I look at MTS, the more I think that the problem with Russia's stock market isn't its companies at all -- or at least, not MTS. In fact, I actually think Vodafone is getting in bed with a very strong partner.

Consider that over the past 12 months, MTS has generated strong operating cash flow -- and more than $2 billion in free cash flow, after you deduct capital spending from that metric. Its finances are so secure that, in the midst of a global credit crisis, MTS has been able to float three 10-billion-ruble debt offerings over the past four months.

To put that in perspective, RUR 30 billion is about $1.1 billion -- or 10% of MTS's own market cap. Bankers don't hand out that kind of money to just anyone in this kind of market. They only loan that much loot to winners -- and that's just what MTS is.

For more on MTS, ring up:

• 5 Foreign Superstars
• Russian Telecom Springs a Leak
• Mobile TeleSystems Surprises, Delights