You see it all around you. Kids are doing their homework on devices smaller than the Sony Walkman you had in high school. They’re posting YouTube videos from their iPhones. They’re sending out résumés while lounging on the campus quad. You’re witnessing a global phenomenon–one that Imari Love keeps his eye on as an international telecommunications analyst for Chicago-based investment research firm Morningstar. Love has his ear to the ground, listening out for smart companies providing voice, data, and Internet services overseas. His research helps investors make sense of the industry’s changing landscape.
Telecom used to be known as a volatile place to invest. Is that still the case?
I deal with vastly different regions and political regulatory landscapes. Spain, Brazil, and Canada; are all at different points in the growth cycle and have different competitive markets. When I first started covering telecom at the beginning of this decade, the industry was grouped in with technology and was looked at as an aggressive, fast-growing, high-upside industry. That’s not the case now. Telecom has more defensive characteristics now. That’s because the cell phone is now a necessity rather than a luxury. In a recession you’re not going to cut off your cell phone service. I think the investors’ mindset has changed as it relates to telecom.
What caused that shift?
Companies are more stable now. The models are more visible; it’s not difficult to project future revenues, earnings, and margins for telecoms anymore, because they’re not in the early growth phases where they’re trying to borrow lots of money for expansion. They are more shareholder-friendly, doing things like giving money back through buy backs. There’s more visibility. Companies are better run now.
Where are things happening in the telecom space these days?
The most attractive place, for me, is the Canadian telecom market. Why? Competition there is intense, but rational. Companies are not trying to undercut each other on price all the time. They are all happy with the extremely profitable market. There are three strong players–Rogers Communications Inc., Telus, and BCE Inc.–with strong brands. No one is really dominant. I like that the market penetration rate is lower there than in the U.S. It’s 65%. Canada introduced wireless service two years after the U.S., Canada also has one of the most reliable and low-cost landline systems. That’s kept the penetration down. Average revenue per user is higher in Canada than elsewhere in international markets.
So, your No. 1 pick is one of those three Canadian players?
Rogers Communications (RCI). The company has a market share of 37%. Rogers’ share of users has been stable for the last few years, but their average revenue per user has been rising each year to its
current 61.5 million (Canadian dollars). They are the only GSM network in Canada, and therefore they are the only company in the country that can sell the iPhone. The two other carriers are doing a network upgrade now and by next year they will be able to start using a bigger range of smart phones, etc. Even so, Rogers will still have the best network. They have the most spectrum across Canada. That means more towers in place and a stronger frequency band. That helps them maintain a network that’s able to run at the fastest speeds. More importantly, the company has no debt maturities for the next two-and-a-half years. They pay a good dividend. They’re just a well-run company. They have a superior landline network too.For you, what’s the most interesting segment of the telecom industry?
Tower companies. One of the things you covet in times of crisis is certainty. What I like about the tower companies in general is that you have great visibility in revenues and earnings. Tower companies are glamorized landlords. The carriers lease space on them. Cellular towers are owned by a tower company, which sometimes owns the land the tower sits on. They do well when they’re able to add more tenants onto a tower. These companies have long-term contracts that have annual price escalators embedded in them. Carriers
look for dead zones and if a tower company’s structure is in the right spot, carriers will lease space. When companies are making cuts, they are not cutting back on this, especially since the burden on networks is becoming greater now that people are sending messages and surfing the Internet on their phones. The next generation networks are about even more data usage.So, what’s your favorite tower company?
I like American Tower (AMT). Companies like American Tower are going to be big beneficiaries of the move toward greater data use. I always tell people, ‘You don’t want to back the soldiers
in the war. It’s better to invest in the companies making the bullets.’ There are two other major players in this space: Crown Castle International and SBA Communications Inc. But American Tower is the best. Their towers are in the best locations. Their land leases (for tower real estate) are cheaper. They have more capacity on their towers, which means more revenue per tower than competitors. What’s great about this company is that when they give guidance on annual revenues, 99% of that money is already under contract, so there’s not a lot of risk there. These are 10 to 25 year contracts. American Tower has the least amount of debt in the group, which gives them the financial flexibility to make new investments in more tower acquisitions. They are also the most diversified of the three companies with towers in the U.S., Mexico, and Brazil. Recently, American Tower closed a deal to acquire 1,700 towers in India, an extremely fast growing market.Do you have another overseas favorite?
Vimpel Communications (VIP). It’s a telecom carrier in Russia. To me, Russia looks like a pretty attractive buying opportunity in general. While nobody’s immune to recession, fundamentally Russia is a much more solid country. Less leveraged; household debt is 3% of GDP. They have strong economic fundamentals. And Vimpel Communications is one of the best-run companies there. They are in a three-player market. Competitive intensity is pretty benign. Russian market penetration rates are estimated at 75%. Vimpel has become the first fully integrated company moving into broadband, not just in Russia, but in the region. They are also launching in Asia in the next few months. They are rolling out 3G technology faster than competitors. Their margins are above 50%. Even with the Russian economy in rough shape, they grew revenues by 30% in the first quarter of 2009. It’s a market that’s on the move. Russia is not for the faint of heart; Vimpel is a fast mover with strong presence in a benign competitive environment.
This article originally appeared in the August 2009 issue of Black Enterprise magazine.