Band Rings up TelMex
10/17/2003 12:00 am EST
"Telefonos de Mexico (TMX NYSE) is Mexico’s answer to our Baby Bells. The company handles not only local and long-distance calls, but also data and video transmission, as well as Internet access—all through a modern 74,000-kilometer fiber-optic digital network. But the industry dynamics are radically different south of the Border. Telmex is adding landlines instead of losing them (like the Babies) to cellular. By 2006, TMX hopes to have 26 million fixed lines installed, versus 15.1 million lines today.
"Small wonder Wall Street is projecting that TMX’s earnings will grow at a 10% annual rate over the next five years, compared with only 2.3% for SBC Communications and 3% for BellSouth and Verizon. Yet TMX sells for a lowly multiple of just 9X this year’s estimated net, against an average of 13X for the Baby Bells. Faster growth at a lower P/E is my definition of a bargain. Better yet, TMX features a juicy 3.7% dividend, well covered out of current cash flow. You’ll receive quarterly checks, just like with a US company.
"Finally, think about the partners we’ve got as TMX shareholders. As we've noted, the stock is owned by John Templeton. In addition, Brandes Investment Partners—run by famed value investor Charles Brandes—owns a whopping 7% (worth $1.3 billion at current prices). Also, Carlos Slim Helu, Mexico’s richest man, controls almost 34% of the stock. SBC Communications holds 8%. Overall, you couldn’t ask for smarter cookies.
"Risks? Competition (mainly from independent wireless operators) is fierce. However, the Mexican telecom pie is expanding rapidly enough for all the players to grab a forkful, including TMX. Buy below $33 for a sweet dividend yield approaching 4%. Note that Mexico imposes a 10% withholding tax on dividends. You can recover this tax on your US 1040, but not if you own the stock inside a tax-sheltered retirement account. As a result, I recommend holding TMX in taxable accounts only."