Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Ever since Argentina elected a new, pro-market president in 2015, investors have been looking for the best way to bet that Argentina will finally reform its economy. Today, Bank of America Merrill Lynch thinks it may have found that company, and it has a promising name: Telecom Argentina (TEO -8.13%).
Here are three reasons why Merril Lynch likes it.
1. Reformers reform -- it's what they do
Since taking office less than two years ago, Argentinean president Mauricio Macri has cut export taxes for his country's goods, eliminated currency controls that artificially supported the Argentinean peso, and sought closer ties to the U.S. He's also loosened antimonopoly laws to permit combinations of cable TV and phone services, similar to what U.S. giants Comcast (CMCSA -2.77%) and Verizon Communications (VZ -0.77%) offer.
Over the weekend, this latter loosening bore fruit when Telecom Argentina announced its merger with Cablevision SA (no relation to the U.S. company, formerly of the same name, now known as Altice USA).
2. What the merger will do
Telecom Argentina will play the role of acquirer in this transaction, issuing 1.2 million shares of stock and trading them to Cablevision shareholders in exchange for their shares. Surprisingly, though, this will leave current Telecom Argentina shareholders with only a 45% interest in the combined company, while current Cablevision shareholders will receive 55% of the new company.
This merger aims to combine Argentina's "leading mobile and fixed telecommunications company" (Telecom Argentina) with its "leading paid TV provider and leader in the broadband market" (Cablevision), resulting in a "quadruple play" for consumers, which enables one-stop shopping for cable TV service, internet, and fixed and wireless telephony.
3. What it means for investors
That's great news for consumers, but what does it mean for investors? As StreetInsider.com reports today, Merrill Lynch thinks the merger will create "high synergies" and "meaningful strength" for the combined company, improving its "competitive position." The banker is therefore upgrading its rating on Telecom Argentina shares to buy and raising its price target on the stock to $30 -- up from $26 previously.
Investors are already applauding the move (and the upgrade), bidding Telecom Argentina shares up more than 10% in Monday trading. But could they climbed even higher? Could they hit Merrill Lynch's new $30 price target?
Let's crunch some numbers and find out.
The upshot for investors: Valuing Telecom Argentina
According to data from S&P Global Market Intelligence, Telecom Argentina booked sales of $3.35 billion over the past 12 months, and earned a respectable 9% net profit margin thereon -- $302 million in net profits. (For context, Verizon in the U.S. earns 9.9%, and Comcast earns 11.1%, so there may be some room for Telecom Argentina to squeeze out additional margin if Merrill's promised "high synergies" materialize.)
As a privately held company, accurate data on Cablevision is harder to come by. S&P Global, however, puts that company at just under $2 billion in sales, and $285 million in annual profits, giving it a 14.4% profit margin.
Why Telecom Argentina, with greater revenue and more profits, is getting a smaller stake in the result of this merger than Cablevision is hard to say. It may be because Cablevision boasts the better profit margin. It may be that Cablevision has greater growth prospects. Regardless, the end result of this merger looks like a company doing roughly $5.3 billion in sales annually, and earning about $587 million in profit on those sales. That's a very respectable 11% net profit margin overall -- in line with what Comcast earns, and ahead of Verizon, and this is all before any hoped-for synergies kick in.
In exchange for these sales, profits, and profit margins, investors today are being asked to pay only $5.8 billion in market capitalization, which works out to 1.1 times sales and about 9.9 times earnings. That's significantly cheaper than, for example, the 15 P/E ratio on Verizon stock, and the 20 times earnings that a share of Comcast will set you back.
That price seems more than fair to own an up-and-coming developing market telecom giant. Mark me down as supporting Merrill Lynch's assessment on this one. I think the Telecom Argentina-Cablevision merger is good news for existing shareholders and new investors alike.