A New Stock Pick – Brasil Telecom (BTM)

I’m not much into speculative purchases and big wins in the stock market. I don’t buy often, but when I do I make sure I’m not just buying into hype. Buy good companies with solid management at good prices habitually, and wealth will become a secondary habit.

Brazil, one of the four BRIC countries, is facing 6% GDP growth (compared to our palsy 0.4%). Such a burgeoning emerging market carries with it consumers hungry for power and convenience. Brasil Telecom’s ADR (BTM) is one of the country’s strongest telecommunication companies. My research began through our friends over at SeekingAlpha.com. They have three divisions – the first being general phone and network connectivity including local, land line, and international dialing. The second division is their mobile phone network, and the third is Internet services (a standard lineup for telecommunication companies).

The company’s 2007 revenue came in at a stellar $5.7 billion USD, 21% higher than last year. Their revenue is growing at a 19% CAGR since its first public statement in 2002 (19% for five years is fantastic). Operating income is a healthy 10% of revenue, which is tough to pull off in capital heavy businesses.

Looking at their ratios, the company is CHEAP. They’re returning 5% on their assets and 15% on their equity, but with a P/E of only 12.6. This is nearly half of the industry’s 23.6 and still less than the S&P 500’s 19.7 P/E. A price to earnings ratio is a good indicator of how expensive the stock price currently trades at versus how much they make in earnings. Many investors (not the good ones) will just stop their analysis here and say “GREAT P/E! LET’S BUY!” But there’s more… It’s PEG ratio is also quite strong (P/E ratio to % Growth rate). The stock is giving you a magnificent 4% dividend yield (which means if the stock does nothing for 12 months, you’re still up 4%).

I took a look at some technical analysis as well, and the stock is trading below its moving averages and in the bottom range of its bollinger bands. If you take a look at this chart, its riding an upward trend and right now is in the bottom of an upswing. I don’t ever suggest trading based solely on technical analysis – but you can use it as support for your investment thesis.

From what I see – the stock is undervalued until about $36.50 per share. After that, you’re free to hold on to it as a growth play. I can’t say I’m certain about the stock. Most analysts on the Street agree with me, including SeekingAlpha.com. I’ve been wrong before, but I’m comfortable with my purchase at $33.40.