Sunday, October 31, 2010

Dialing for Dollars in Argentina

Telecom Argentina S.S. (TEO) focuses its efforts in offering a full range of integrated fixed and wireless services. The company’s mobile strategy is oriented towards improving the mix of postpaid users by promoting 3G services, better customer service and high-end handsets. Mobile data services have room for growth despite VAS accounting for 38% of service revenue, as most revenue from VAS relates to text messaging. The strategy on fixed business continues to center on bundle offerings that include voice and broadband services.

TEO has strong operating performance driven by mobile services, solid market positions, diversified portfolio of services with multiple platforms and a strong financial profile. There are certain risks in investing in Argentina. Among the risks are political instability, an unfavorable regulatory environment and currency risk, among others.

In a recent development, Telecom Italia (TI) is to take control of TEO. Under the plan, TI will have a controlling stake in Sofora, a holding company that in turn has a controlling stake in Telecom Argentina.

The company’s favorable prospects are borne out by the financial statements. The statements show consistent growth built on a stable and strong balance sheet.

Sales for 2Q10 came in at $877.6 million or 18.6% more than the $740.2 million reported in 2Q09. Sales for the TTM totaled $3,337.7 million as compared to $2,862.4 in the year-ago period and $3,094.0 million for FY09. The average growth rate for sales over the past five years is 22.2%. Six analysts make sales projections for TEO. The consensus projection for FY10 is $3,648.02 million and $3,702.55 million for FY11.

EPS for 2Q10 was $0.58 as compared to $0.45 in the year-ago period. EPS TTM is $2.01 as compared to $1.35 for the year-ago period and $1.60 for the year ending December 2009. Analyst forecasts for FY10 range from $2.26 to $2.59 with an average of $2.39. Projections for FY11 range from $2.34 to $2.73 with a consensus of $2.47. Y-O-Y, EPS grew at 48.9% and 25.6% when compared with FY11. EPS has grown at the rate of 29% over the past five years.

Free Cash Flow has been much more volatile over the years. At $1.46 TTM, it is down (25.1%) from the year-ago period. The five year growth rate for FCF is a paltry 0.6%.

A big plus for TEO is the dividend. It is currently paying a dividend of $2.15 per share, providing a yield of about 7.9%. Clearly, a dividend in excess of earnings or cash flow is unsustainable and represents a red flag.

The balance sheet reflects strength. Cash and ST investments total $301.9 million whereas long term debt is $18.7 million and other long term liabilities add another $249.3 million to the tab. Total liabilities are less than 5X free cash flow.

The company has steadily increased its gross profit margin. The normalized margin is 43.02%. For TTM, the gross margin rose to 50.1%. This compares favorably with the industry median of 48.9%. We see even better improvement in operating margins. The normalized operating margin for TEO is 14.85%. The most recent operating margin is 21.9% whereas the industry median declined to (0.8%). Net margins have been up and own over the years. In FY05, the margin was 20.1%. The following year, the margin declined to 7.8%. Since then, net margin has grown to 11.9%; better than the industry median of 0.3%.

TEO reports a return on equity of 29.1%, as compared to the industry median of 14.4%. However, reported ROE has steadily declined as the company deleveraged. Return on assets have steadily grown and is now at 14.4%.

Deleveraging clearly shows up in the debt management ratios. Total liabilities to total assets are 51.1% compared to the normalized ratio of 65.78% and the industry median of 74.5%. Lon term debt to equity has declined to 1.4% from 242.9% in 2004. Long term debt to capital is also 1.4%.

The company is better managing its assets. Receivable turnover is up to 9.7X compared to a five year average of 8.78X and the industry median of 7.7X. Asset turnover improved to 1.2X from 0.3X in 2003 and is better than the industry median of 0.7X. Finally, inventory turnover stands at 24.5X as compared to the industry median of 16.9X.

With a P/E TTM of 11.9X and a P/E est. EPS of 10X, TEO does not look expensive when compared to the industry PE of 14.4X.

DISCLOSURE: Author is long TEO.

Sunday, October 17, 2010

InterDigital, Inc.: The Future in Cellular Communications

InterDigital, Inc. (IDCC) is basically a R&D outfit specializing in developing cellular and wireless technologies. If you use a cell phone, PDA or tablet, you probably use IDCC technology. The Company is not a manufacturer. Its business model relies upon licensing patented technology to manufacturers such as Nokia and Samsung. InterDigital is an early entrant to this industry and has been around for many years. Its technology innovations are found in every area from 2G to the latest 4G and LTE products. The customer base is global though most manufacturing takes place in Asia. The Company sells its products in dollars so there is little currency risk.

Highlights from the 2Q10 are as follows:

· Net income of $35 million, or $0.78 per diluted share, a 32 percent increase over 2Q09 EPS of $0.59;

· Revenue of $91.2 million, a 22 percent increase over 2Q09 sales of $74.9 million;

Looking at the trailing twelve months ending June 30, 2010:

· EPS of $3.39 as compared to $1.95 in FY09

· Restated revenues of $359.3 million as compared to $259.3 million in the 12 month period ending 06/09

· Net income (TTM) of $182.1 million compared to $86 million in FY09

· Operating margins (TTM) of 51.9 percent, ROE of 92.5 percent and ROA of 19.7%

· Net margin of 50.7 percent

· CFROI of 38.17 percent

The Company has a strong balance sheet:

· As of 2Q10, reported cash and short term investments of $485.8 million

· Virtually no long term debt but $426.4 million in other long term liabilities

· Current ratio of 2.9X

· Liabilities to Assets of 71.9 percent

· Long term debt to capital 0.1 percent

· Book value of $6.04 per share and TBV of $3.18

· Total liabilities to average free cash flow is less than 3X

On a valuation basis, the company looks undervalued.

· P/E (TTM) is 8.7X and the forward looking P/E to estimated EPS is 9.2X

· The PEG based on estimated EPS and growth is a low 0.6X

· Low EV/EBITDA of 4.98X

· For the FY ending 12/10, four analysts project EPS in the range of $2.83 to $3.44, providing a consensus of $3.22

· Four analysts also project EPS for FYE 2011. Here, the range is $1.70 to $3.68 with an average of $2.58

· The June 10 reported earnings was 28 percent higher than analyst consensus forecasts.

The fortunes of IDCC are tied closely with the worldwide market for cellular devices. Handset sales have declined in the recent past but will rebound, we think, with the roll-out of 4G devices. IDCC will benefit from the popularity of tablet computers. The company’s strength lies in not having capital tied-up in inventory or capital equipment. It can use its excess cash to continue the stock repurchase program started in 2009 but suspended thus far, in 2010, provide a dividend or find an accretive acquisition. It cannot sit on the cash indefinitely; it must do something to increase shareholder value.

IDCC will be releasing its third quarter results at the end of October. It would be prudent to wait until then before prognosticating further.

Disclosure: Author has a long position in IDCC

Sunday, October 3, 2010

Company Focus: Lubrizol Corporation

The Lubrizol Corporation (LZ) is an innovative specialty chemical company that produces and supplies technologies to customers in the global transportation, industrial and consumer markets. These technologies include lubricant additives for engine oils, other transportation-related fluids and industrial lubricants, as well as fuel additives for gasoline and diesel fuel. In addition, Lubrizol makes ingredients and additives for personal care products and pharmaceuticals; specialty materials, including plastics technology and performance coatings in the form of specialty resins and additives. Lubrizol's industry-leading technologies in additives, ingredients and compounds enhance the quality, performance and value of customers' products, while reducing their environmental impact.

Lubrizol has a broad geographic footprint in that it has manufacturing and research facilities in 27 countries. Sales are made to more than 100 countries, basically the whole world. The Company has two operating segments: Additives and Advanced Materials. The Additives segment produces engine additives and driveline and industrial additives. The Advanced Materials segment produces engineered polymers, a product line called Noveon and performance coatings.

Sales for the quarter ending June 2010 totaled $1,401.2 million or 26.1% greater than the year-ago quarter of $1,111.0 million. Similarly, sales for the trailing twelve months ending June 2010 of $5,179.6 million were 12.9% greater than the $4,586.3 million reported for FY09 ending December 2009.

Quarterly EPS 2Q10 is $2.89 as compared to $1.92 for the year-ago period. This is a 50.5% increase in EPS. EPS diluted for the trailing twelve months ending June 2010 is $9.59, or 32.1% greater than FY09 EPS diluted of $7.26. Reported net income for TTM ending 06/10 is $668.4 million, or 33.5% greater than FY09 reported net of $500.8 million.

Along with greater levels of sales and increases in reported net income, we are seeing expansion of gross margins. GM expanded for 34.2% in 2Q10 as compared to 33.0% in FY09 and 22.3% in FY08. Operating margins continue to improve, as well. For 2Q10, OPM is 19.2% compared to 17.9% in FY09 and 1.3% in FY08. Having squeezed out efficiencies, net margin increased in 2Q10 to 12.9% from 10.9% in year-end 09.

The balance sheet appears to be strong and stable. Cash and short-term investments total $972.2 million while current liabilities total $669.7 million for the quarter ending June 2010. The quick ratio is 2.8X and the current ratio is 3.8X. These indicate that the Company has no problems meeting its short term obligations.

Looking at long term obligations, we find that Lubrizol has long term debt of $1,351.6 million and other long term liabilities of $691.5 million. Total liabilities to total assets are 56.1%, less than the industry median of 58.9%. Long term debt to capital is 38.9%, greater than the industry median of 23.3%. Long term debt to equity is 63.6% whereas the industry median is 21.8%. Total liabilities to the four year average free cash flow is approximately 5X.

Lubrizol pays an indicated dividend of $1.29 per share providing a yield, at current prices, of 1.4%. The dividend represents a payout ratio of 13.2%.

Looking ahead, analysts are projecting FY10 EPS ranging from $9.85 to $10.15 with a consensus forecast of $10.05 per share. Reuters reports that five analysts estimate sales in the range of $5,294.8 million to $5,555.0 million with a consensus of $5,418.4 million. Analysts are optimistic for FY11, as well. They project EPS ranging from $9.20 per share to $11.00 per share averaging $10.25. These projections are based on sales estimates of $5,322.3 million to 5,856.0 million and a consensus forecast of $5,597.4 million. The FY10 sales estimate represents a 18.1% increase over FY09 sales. Analysts expect a slowdown in earnings growth though they have been surprised in the last two reported quarters.

Shares of Lubrizol are currently selling at 11.1X trailing twelve month earnings of $9.59 per share and 10.6X estimated EPS. Forward looking EPS growth is estimated at 23.4%. The Company pays a dividend and has been buying back stock. Given that Lubrizol is selling at a discount to the market, has good prospects, pays a well-covered dividend and is buying back stock, we believe Lubrizol is worth a close look.

DISCLOSURE: The author holds a long position in Lubrizol.
Seeking Alpha Certified