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This Is One Cheap Sector! Is Now the Right Time to Buy?

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Every once in a while I need to slap my own wrist for forgetting to add some longtime favorites to my watchlist. Luckily for me, the market has been heading precipitously lower over the past month, so it's not as if I've missed a big rally. But if not for today's earnings report from Russian mobile operator Mobile TeleSystems (NYSE: MBT  ) I would have completely forgotten about one of my favorite turnaround candidates -- the Russian mobile sector.

Russia gone wild
About five years ago I realized that at some point, mobile saturation rates in Russia were going to peak. And with competition rapidly ramping up, margin rates for the largest companies in the sector -- namely, Mobile TeleSystems and VimpelCom (NYSE: VIP  ) , would come under pressure. Fast-forwarding, it appears that this competition has finally caught up with both companies. Profits for both have been steadily falling over the past year as margins have contracted and subscriber growth has slowed.

Still, if you can look past Mobile TeleSystems and VimpelCom as growth stories and consider them deep value plays, I think you'd be surprised at how they stack up next to some of their peers. Let's take a closer look at Mobile TeleSystems after yesterday's second-quarter results.

For the quarter, Mobile TeleSystems reported a 13% jump in revenue, which included a 10% year-over-year jump in mobile revenue. Most significantly, investors were disappointed with the company's OIBDA guidance -- a margin measurement that determines how efficiently a company can create and sell its products and services. After forecasting an OIBDA range of 42%-43% earlier in the year, the company lowered guidance into the "low 40%" range as competition among SIM-card sales has increased. However, even with an OIBDA of 41.6%, the company remained very profitable for the quarter, with net income of $367 million.

What's not to like?
After digging deeper into Mobile TeleSystems' report, I have to wonder: What's not to like? Along with VimpelCom, these two mobile operators control 56% of all market share in Russia, or roughly 126 million subscriptions, according to market-research firm AC&M. It's clear that subscription growth is slowing, as the subscription data from July showed only a 0.7% uptick over June.

However, compare MTS's projected growth rate of 12.2% over the next five years, or even VimpelCom's 11.8%, with those of U.S. mobile giants Verizon (NYSE: VZ  ) , at 8.7%, AT&T (NYSE: T  ) , at 3.8%, or Sprint Nextel (NYSE: S  ) , at 4.5%, and you'll see why I still think this company is an attractive buy. I'm pretty sure right about now the income-seekers are raising their hands and wondering what MTS or VimpelCom have done for them lately, because we all know AT&T and Verizon are dividend champions. How does a 4.2% yield from VimpelCom and a 6.3% yield from MTS sound? Not too shabby, I would say, especially since VimpelCom's payout ratio is only 41%, implying plenty of upside growth potential in its dividend.

These Russian mobile providers not only go toe-to-toe with U.S. mobile giants on dividend payouts but also beat them handily on a valuation basis.


Forward P/E


Price/Operating Cash Flow

Mobile TeleSystems 7.2 1.3 4.1
VimpelCom 6 1.3 3.8
Verizon 13.5 0.9 3.4
AT&T 10.9 1.3 4.6
Sprint Nextel N/M 0.3 2.3

Sources: Morningstar, Yahoo! Finance.

Sprint Nextel looks cheap relative to sales and cash flow, but it can't hold a candle to companies that actually are turning a full-year profit. AT&T and Verizon are mixed, with Verizon actually appearing cheaper than the Russian giants on a cash-flow comparison. Considering the volatile nature of Russia's economy, both VimpelCom and MTS are trading at earnings multiples significantly below those of their U.S. counterparts.

The last time MTS or VimpelCom traded at such low valuations was during the height of the credit crisis in 2008. Since then, both companies have bounced dramatically off their lows. With double-digit growth still projected and a huge subscription safety net under their wings, I see a lot of value hidden in these two Russian mobile giants.

What's your take on Mobile TeleSystems or VimpelCom? Would you put money to work in either at the moment? Share your thoughts in the comments section below and consider adding Mobile TeleSystems and VimpelCom to your watchlist -- which is what I'm going to do right now.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong  Motley Fool newsletter services have recommended buying shares of AT&T. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that will never crank-call you at 3:30 a.m.

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