The Kremlin of the Crop

VimpelCom doesn't seem to be running out of oomph. In fact, its shares look likely to head higher. They turned up recently in our Accelerating Sales Growth screen.

Our screen looks for companies whose sales are doing just the opposite of what they usually do as a company ages. Sales growth generally slows as a business matures. That's because one of two things usually happens: Either the company loses out to competitors (Netscape) or it succeeds so well that it puts its products in the hands of nearly every customer it could hope to attract (Microsoft).

A company's sales growth can suddenly quicken, though, for any of a variety of reasons. An ad campaign might prove wildly successful (Aflac). A new product might catch on big and even have a spillover effect on sales of the company's other products (Apple). Of course, the explanation could be more mundane than that. A company might just buy a competitor, thereby adding to its sales overnight. Still, it's worth running a screen from time to time for companies whose sales growth is quickening.

If operational improvements are afoot, then there's a good chance they could play out gradually over several quarters or several years, sending shares gradually higher in the process. Case in point: VimpelCom. Having recommended the stock in 2003, we did so again when it turned up on our Accelerating Sales Growth screen in August 2004. The stock's up more than 150% since then.

Our screen looks for companies whose sales have grown faster in the past quarter than over the past year, and faster over the past year than over the past three years. It also looks for share-price momentum, recently increased earnings estimates and generally favorable analyst recommendations. See our recipe of criteria for details on everything the screen looks for and use our stock screener anytime to run the search for yourself. It recently reduced an 8,000-company database to just eight names.

VimpelCom's sales jumped 53% in its most recent quarter, reported Nov. 30. Part of the improvement was due to a 21% year-over-year increase in subscribers, but just as impressive was a 12% increase in average revenue per user. Operating profit before accounting adjustments increased 60%. Margins hit an all-time high. Operating cash flow increased 62% to $640 million. Per-share profits of $1.32 topped Wall Street's expectations by nine cents.

A new regulation called "Calling Party Pays," introduced in Russia in July, was expected to trim sales. The rule bars cellphone service providers from charging for incoming calls, but it also allowed them to start collecting connection fees from fixed-line phone companies. Management believes it also stimulated cellphone use. Customers who don't have to worry about being charged for incoming calls might be keener on signing up for accounts.

Analysts say that increased phone usage and pricing are now taking over for subscriber growth in driving profits for VimpelCom. It's a good thing. The market for cellphones there is plenty saturated. For example, Moscow and St. Petersburg have more cellphone accounts than they have residents, thanks to the widespread use of multiple smartcard-based accounts. But Russians spend less than half the level of emerging-market economies on cellphone services, despite an economy that's growing at a faster clip than those of comparable countries. That suggests there's room for improvement.

"We forecast minute-of-usage growth will average 4% per year in 2006-10 driven by rising disposable incomes and further proliferation of the 'mobile' culture, in particular in the data segment thanks to the wider availability of affordable data-friendly handsets," wrote Elena Bazhenova, and analyst with MDM Bank in Moscow, who holds a Buy recommendation on VimpelCom. "We think this estimate is rather conservative as it implies that by 2010, the average Russian subscriber will still only spend 4.4 minutes on a cellphone per day (vs. an average 10 minutes for emerging markets in 2005)."

Analysts, on average, now expect the company's earnings to grow by 21% a year over the next five years. That makes a stock, at 22 times Wall Street's 2006 earnings forecast, look cheap. Divide the price/earnings ratio by the growth forecast and you get a PEG ratio of just over 1.0. Compare that with Sprint Nextel's (S) 1.6 or Deutsche Telekom's (DT) 1.4, or with the other leading cellphone company in Russia, Mobile Telesystems (MBT), which has a PEG of over 3.0. Or compare it with the broad U.S. stock market, which has a PEG of just over 1.5. All told, VimpelCom still looks like a bargain.