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Why I'm Long Argentina Despite Default Fears

In late August, a ruling from a New York Court of Appeals determined that Argentina had to pay in full to holdouts from its 2001 default. Moreover, the court determined that if the country does not pay to holdouts, it cannot pay to its exchange bondholders. Because Argentinean authorities, including the president Cristina Kirchner, have repeatedly declared that under no circumstance would they pay in full to holdouts, the country might fall back into default.

That said, the recent primary parliamentary elections indicate that the power will change hands. This is not a minor detail. All the potential presidential candidates (Massa, Scioli, De La Sota among others) are far more market-friendly than Cristina Kirchner. Thus I would expect a dramatic change in Argentina's economic policy after 2015, when presidential elections are to be held. This makes me think now is the time to start accumulating Argentinean assets despite the high short-term default risk. Here I recommend two stocks that could soar as a government change approaches.

Betting on telecommunications
Telecom Argentina
(NYSE: TEO  ) might still be one of the cheapest telecom stocks in the world despite being up by 57% year to date. The company has zero net debt, declining churn, growing market share in all segments (mobile, fixed-line, and Internet services), and a very low market valuation. Most importantly, Telecom Argentina, which is controlled by Telecom Italia and the Werthein family, is not suffering from any of the pricing pressures most telecom operators in the world are experiencing

Telecom Argentina is growing sales at a 5.4% year-over-year pace, growing its mobile customer base by 3% year over year, and generating a stable 30% EBITDA margin. This company, which controls more than 30% of the mobile market in Argentina, trades at 6.3 times P/E -- a low multiple for a company that's still expanding sales without deteriorating its margins.

Even when the government has practically banned dividend payments for almost all Argentinean companies trading in the U.S., Telecom Argentina has found a way to give cash back to its shareholders through buying back its own shares. Telecom Argentina has been authorized to buy more than $200 million of its own shares, and I expect this program to be expanded until the end of next year as the company keeps on generating a 16% operating free-cash-flow yield.

My favorite oil bet
Petrobras Argentina
(NYSE: PZE  ) , or simply Pesa, is my favorite oil company, given its prospects and its low valuation. Besides, there is a considerable and increasing chance that a merger or acquisition will take place soon. Pesa's controller, Brazilian oil giant Petroleo Brasileiro (NYSE: PBR  ) , a.k.a. Petrobras, is involved in a turnaround process and is reportedly willing to sell part of its 67% stake in Pesa.

As a matter of fact, I expect a deal to be closed sooner than later. Pesa is a wonderful asset with an enormous acreage position in the Vaca Muerta formation (the world's third-largest shale oil and gas reserve), very low debt (0.4 times EBITDA), and ameliorating operational performance. For its first quarter, Pesa reported improved results as revenue and EBITDA increased by 6% and 31% year over year, respectively. This was a result of the solid performance of the exploration and production segment. Indeed, EBITDA margins increased to 27%. If we compare these figures to the ones presented by Petrobras, the great performance achieved by the Argentinean subsidiary becomes clear: Petrobras Brazil has a net debt of 2.6 times EBITDA, and its EBITDA margins are just below 20%.

Furthermore, the current valuation of Pesa is too attractive to ignore: While paying a 2.7% cash dividend yield, Pesa trades at a P/E of 6.6. Meanwhile, Petrobras pays no dividend and trades at 7.5 times earnings. I'm long Pesa right now.

A government change will bring Latin America's third-largest economy back into international investors' consideration. Now is a good time to start positioning yourself into Argentina's best assets in order to catch a future rally, even as an adverse New York court ruling threatens to bring the country back into default. The risk in Argentina is real, but I believe Telecom Argentina and Pesa are great value plays to get into Argentina before everyone else does.

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  • Report this Comment On November 09, 2013, at 12:45 AM, RyanPeckyno wrote:

    I agree. TEO, PZE, CRESY, etc. are all solid plays. I intend to go bargain hunting in Argentina shortly.

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10/25/2016 4:01 PM
PZE $6.98 Down -0.06 -0.85%
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TEO $18.60 Down -0.11 -0.59%
Telecom Argentina CAPS Rating: *****
PBR $12.18 Down -0.23 -1.85%
Petroleo Brasileir… CAPS Rating: **