Highflier VimpelCom Lands in Bargain Bin

WHEN GROWTH INVESTORS sell, the saying goes, they sell to value investors. That is perhaps happening now with VimpelCom (VIP), a Russian cellphone service provider. After years of searing growth and heady stock gains, it has slowed but not stalled, and now fetches a price/earnings ratio not much higher than those of stodgy American carriers.

In 1996 fledgling VimpelCom became the first Russian company since czarist rule to list on the New York Stock Exchange. Shares debuted at just over $2, adjusted for splits. A 1998 ruble crisis erased the company's profits and sent its stock to 30 cents, but the subscriber count kept growing, to 780,000 by 2000. Gradual gains in wealth bought new chattiness to Moscow and St. Petersburg; VimpelCom more than doubled its subscriber base in each of the next three years.

Today the company has 52 million subscribers under its Beeline brand service. That growth has been reflected in the stock's price. It went for $3 and change when this column first recommended it five years ago and fetched $16 by the time of a December 2006 follow-up recommendation. Late last year it briefly crossed $40.

Investors who missed out might have a look now. The stock has fallen below $29, despite strong recent growth for the company. First-quarter results, reported June 4, showed profit more than doubling. Some of that is owed to the ruble's gains against the dollar. But operating income before depreciation and amortization, or OIBDA, a narrower profit measure, jumped 47% to $1.13 billion, vs. analysts' forecast of $1.05 billion. Sales swelled 42% to $2.1 billion.

The increase in OIBDA as a percentage of sales, to 53.4% from 51.5% a year ago, was unexpected. It also might not last. In February VimpelCom completed the $4.3 billion purchase of Golden Telecom, which sells fixed-line phone and broadband service at lower margins than VimpelCom's cellphone service earns. Perhaps knowing that investors were watching margins closely, management reduced its marketing spending during the first quarter. Of course, that comes at a cost. Average revenue per user dropped slightly from the end of 2007. Margins are expected to dip in coming quarters as VimpelCom fully folds in Golden's results and spends more on marketing. Management is targeting OIBDA margin of close to 50% within two years.

Casting a pall over the healthy financial results was a slight loss of Russian market share to leading carrier Mobile Telesystems (MBT). Russia provides more than 80% of VimpelCom's sales and profit. The resulting selloff suggests investors fear a price war. Even without one, the markets that propelled VimpelCom shares in recent years now seem tapped. Moscow and St. Petersburg have more cellphone accounts than customers, a feat made possible because accounts there generally correspond with data cards that can be swapped among phones, and many customers have cards from multiple carriers.

If VimpelCom can avoid a wireless price war, it should find plenty of new growth opportunities. Less than 10% of Russian households are reached by fixed-line broadband, analysts say, and growth in that space is accelerating. Many of VimpelCom's newly acquired fixed-line phone customers are businesses, which should provide ample opportunities to cross-sell wireless services. The company's sales in markets beyond Russia — Kazakhstan, Ukraine, Uzbekistan, Tajikistan, Georgia and Armenia — are growing faster than its domestic business. And it has fresh plans to expand into Vietnam.

Analysts see VimpelCom's per-share profit increasing 44% this year. That, combined with the stock's recent slide, has put shares at less than 14 times forecast earnings, matching, for example, Verizon's (VZ) P/E. But VimpelCom is expected to deliver 20% earnings growth in 2009, nearly double that of Verizon.

VimpelCom turned up in a recent search for companies whose profits look robust relative to the capital invested to produce them. Have a look at all eight screen survivors if you like and run the search for yourself anytime using SmartMoney's stock screener and the full list of criteria.

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