Moscow Calling

In case you've been absorbed in the agonies of defeat and the ecstasies of victory in our very own Motley Fool Stock Madness 2005 tournament, this just in from Mother Russia: The largest mobile phone operator in the former Soviet Union just phoned in another record-breaking year.

Over in the world's biggest country, they like things big. Big missiles. Big oil. Big numbers. And speaking of big numbers, how do these, just posted by Russia's Mobile TeleSystems (NYSE:MBT), grab you?

• Subscribers up 105% over fiscal 2003
• Churn rate down 42%
• Revenues up 53%
• Operating profits up 59%
• Net profits up 98%
• Free cash flow up 300% (to $508 million)

By contrast, here in the U.S., everyone from AT&T (NYSE:T) to SBC (NYSE:SBC) to Sprint (NYSE:FON) to Verizon (NYSE:VZ) posted single-digit revenue growth at best last year (and at worst, negative growth). With the exception of Verizon, they all endured negative earnings growth as well.

Investors do need to be aware, however, of the flip side to Mobile MTS's rapid expansion: It's running out of room. According to the company, mobile penetration in Russia proper has already doubled to 51%. In Ukraine, penetration has progressed more slowly, reaching 29% by the end of last year.

The inevitable slowdown in MTS's subscriber growth mirrors another trend, earlier highlighted by my Foolish colleague and fellow venturer into the wild and woolly world of Russian equities, Seth Jayson. Back in August of last year, Seth pointed out that MTS grew its revenues by 78% over the year-ago quarter in Q4 2003, by 71% in Q1 2004, and by 61% in Q2 2004. Speaking of which, Q4 2004 saw that rate of revenue gains slow even further, to "just" 40%.

In addition to the already well-publicized, shall we say, regulatory difficulties facing investors in Russia, that rapidly declining rate of growth is a likely contributor to MTS's depressed valuation. With a market cap of $14.3 billion and net debt of $1.6 billion, MTS currently sports an enterprise value of just under $15 billion. At $500 million in annual free cash flow, the company's EV/FCF ratio is only 30. Compare that to the 22 ratio sported by one of the few U.S. telecoms showing revenue growth last year, Nextel (NASDAQ:NXTL). With MBT having just posted revenue gains of better than twice Nextel's, you might expect MTS to trade for an EV/FCF of closer to 45.

The fact that it doesn't suggests that the market is telling you something: The faster they grow, the sooner they'll slow.

Study up on the Russian telcos with:

• Russia's Sistema Ain't YUKOS
• VimpelCom Calls in the Cavalry
• Vimpel Is No VIP in Russia
• A Mobile Russian Bear

Fool contributor Rich Smith owns none of the companies mentioned above.