This Foreign Telecom Is at a 52-Week High, but It's Still a Buy

Shares of Mobile TeleSystems (NYSE: MBT  ) hit a 52-week high on Friday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
The reason Mobile TeleSystems, also known as MTS, is at a new 52-week high has to do with Russians' practically insatiable demand for cell phones. MTS is the largest mobile service provider in Russia, counting 71.23 million customers in a country of just 143 million people. Total cellular penetration among all carriers in the country is actually 161.3% as many users choose to have more than one SIM card, leaving MTS and its competitors, VimpelCom (NASDAQ: VIP  ) and MegaFon, plenty of pricing power.  

In MTS' third-quarter results, the company noted that its mobile business grew 8% year over year as churn rates (which are considerably higher in Russia than here in the States) dropped to 10.3% from 11.9%. Outside of Russia, MTS showed moderate growth as well. Ukraine, which also boasts very high penetration rates, still generated 7% revenue growth thanks to the ongoing modernization of its landline network. Data traffic in the region grew 12% despite the fact that there's not even a 3G network in place yet. 

With plenty of modernization yet to play out, as well as Apple (NASDAQ: AAPL  )  having such a small market share in the region and planning to make a bigger push into BRIC countries, MTS' prospects have been brightening.

What could derail MTS
In spite of these positives, three primary factors could knock MTS off its high horse: market saturation, competition, and political instability.

Although market saturation and competition might appear to go hand-in-hand -- and in some instances they would -- MTS has to worry separately about the cooperation of smaller providers in the region as well as to ensure that its markets still offer growth potential. While I'd hardly call this an instance of "cooperation," both VimpelCom, and the No. 2 provider in the region, MegaFon, have each purchased a 50% stake in Euroset, a 5,500-store retail outlet which will greatly expand the number of stores offering their mobile services. This is worrisome for MTS, as the greater exposure for its peers could increase its churn rates and, I'd have to assume that with penetration rates already high, there's little growth left in Russia, aside from upgrades.

We're seeing a similar situation play out in Brazil where TIM Participacoes (NYSE: TSU  ) , a unit of Telecom Italia, recorded its slowest year-over-year revenue growth in nearly two years in the fourth quarter. Brazil is in the midst of upgrading to 3G networks, so it's a bit ahead of Russia in terms of deployment and mobile upgrades, but saturation remains high at 126.5% according to Brazilian telecom agency Anatel, and appears to be sapping growth prospects in the country.

Finally, political instability in Russia is a constant threat to wreak havoc on the ruble and, thus, the underlying profitability of these providers.

What's next
I've maintained a CAPScall of outperform on the company for well over a year and I see no reason to close that call, which is currently up 29 points versus the S&P 500.

For one, the "Apple factor" is going to play a major role in customer upgrades once MTS and its peers upgrade its infrastructure to 3G or 4G capability. It's no surprise Apple has little penetration in some regions given the lack of wireless infrastructure, but, make no mistake about it, Apple will be diving headfirst into Russia and its surrounding countries as soon as the infrastructure is present. With Apple being such a globally recognizable brand, it should create higher average revenue per user, or ARPU, rates, which is the engine that drives telecom growth.

Second, even with VimpelCom and MegaFon purchasing equal stakes in Euroset, they are far from cooperating with other. Unless the two were to somehow join forces, barring some horrible missteps on MTS' part, there's almost no way it'll cede its No. 1 provider spot in Russia.

Finally, MTS is a cash cow. Despite the global challenges of the past five years, MTS has averaged free cash flow of $1.5 billion and is currently paying out what I deem to be a sustainable 3.8% yield. With MTS, you get a broad-reaching customer base and yield similar to that of a domestic telecom like Verizon, but you also have the chance of experiencing emerging market acquisitions and upgrade growth.

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