Telecom Is the Way to Go

Robert Hsu, November 28, 2007

Telecom is an especially strong sector right now because these companies link countries together in today's global economy. The most promising telecom opportunities are in developing countries that haven't experienced much media coverage. This week, I want to focus on shifting our telecom strategy a little bit so that we are well-positioned to take full advantage of the sector's potential.

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New Telecom Buy

Our new buy this week comes from an economy that we have never invested in before: Israel. Usually Israel makes headlines for all of the political strife happening in the Middle East, so many investors aren't aware that the country has a strong competitive edge in today's information economy. Believe it or not, the tiny country is developing into a high-tech center. Israel is forging ahead technologically and establishing a name for itself in industries like software and generic drugs.

The country also has a highly educated and disciplined workforce. With its tech edge and skilled workers, Israel's GDP is growing at a rate of about 6% per year. Even though it's a small country without much in the way of natural resources, it's using its strengths to get ahead in areas that are critical in today's era of global trade and information exchange.

Our new play on Israel is an established company that started in 1994, but didn't go public until this past February. The company is the largest mobile phone operator in Israel. The company provides a variety of services, from talk and text messaging capabilities to advanced cellular content and data transfer. It also sells handsets and offers landline and roaming services.

A lot has changed in the Israeli mobile industry since the company was founded, but it has managed to keep up with the rapidly evolving market. In the 13 years since it first opened its doors for business, the mobile phone has gone from an Israeli luxury item available only to the privileged to a "must-have" for everybody.

And the company has done a good job of providing mobile services for all of the new cell phone owners in Israel. Today, the company provides services to more than 3 million subscribers. That represents 34% market share in its home country!

The company also has a unique home-field advantage -- its deep commitment to Israeli culture enables it to understand its customers' needs better than foreign competition. The company leverages this strength to increase its subscriber base and customer satisfaction. The company is known for its stellar customer service and strives to make every customer interaction pleasant.

Strong Financials

Early this month, the company reported terrific third-quarter earnings, boosted by cost cuts and higher revenue from data and content services. Net income doubled (increasing 105%) to $67 million or 68 cents per share from $33 million or 34 cents one year earlier. Meanwhile, total revenue increased a healthy 7% to $392 million.

The company's subscriber base grew by 57,000 to 3.02 million people at the end of September. Its number of 3G subscribers also climbed, reaching approximately 281,000 -- up an impressive 33% from the previous quarter. Its customer base is now larger than that of its major rival, Partner Communications, which has only 2.8 million subscribers.

It also said it plans to pay a dividend of 67 cents per share or a total of $65 million on December 3. Given Israel's tame inflation rate and appreciating currency, I believe the company's strong earnings growth will continue.

I also like the company because it has rallied sharply during the recent market correction. This is a sign of strong momentum, and I believe this strength will continue thanks to its cheap valuation (its P/E ratio is only 14!) and an attractive 8.8% dividend.

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