Ringing Up Profits In Russia And Beyond

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

That’s because despite all the ups and downs of global stock markets, the inexorable impetus of what has been the fastest-spreading technology in history — the cell phone — is the most predictable of global megatrends. This week’s Global Bull Market Alert pick takes us to Russia, and the first fully listed Russian stock on NASDAQ, Vimpel-Communications (VIP) (Vimpelcom).

Vimpelcom is up more than 1,000% since I first invested in the stock when it went public in 1997. Here’s why I think Vimpelcom will continue to generate big profits for savvy investors over the coming months.

First, like many cell phone providers in emerging markets, Vimpelcom is still growing by leaps and bounds. Its financial results for 2006 bear this out. Revenues for 2006 increased to $4.868 billion, up 51.6% from the previous year. Net income for 2006 totaled $811.5 million, a 31.9% jump from 2005. Earnings per share were up by 30.4% year-on-year, despite some extraordinary costs incurred thanks to tax litigation. Operating cash flow for 2006 rose 51.8% to $1.971 billion, yielding free cash flow of $459.2 million for the year — marking Vimpelcom’s first positive cash flow, ever. Overall, sales and revenues per user for 2006 beat analysts’ consensus forecasts.

Second, Vimpelcom is spreading its wings beyond its core market of Mother Russia. In fact, Vimpelcom expects that the bulk of its future subscriber growth will come primarily from CIS countries outside of Russia. In 2006, Vimpelcom added 10 million new subscribers to bring its total customer base to 55 million. An estimated 7 million of those customers are non-Russian. Vimpelcom also leapt to #1 in Kazakhstan (1.8 million additional subscribers), after two full years of operations. The company now will be focusing on the Ukraine (1.6 million additional subscribers) to tap additional growth. This past year, Vimpelcom also entered Uzbekistan, Georgia and Armenia — increasing the population in the territories covered by the company’s licenses to 240 million.

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Third, just this past Friday, Vimpelcom announced that it had won a license to provide 3G services across Russia. 3G, a high-speed mobile network that offers a variety of enhanced data and video services along with traditional voice calls, is expected to be used by every third Russian within the next three years. Vimpelcom plans to provide 3G services in Moscow, St. Petersburg and Novosibirsk by the end of 2008. The new 3G services are high margin businesses that will drive Vimpelcom’s profits ahead for many years.

For all its terrific prospects, Vimpelcom remains relatively inexpensive, trading at a forward P/E of 13.10. The company’s Price Earnings to Growth (PEG) ratio is only .62, making Vimpelcom a bargain for a company with its exceptional growth prospects.

So buy Vimpelcom (VIP) at market today and place your stop at $78.25. Vimpelcom is a volatile stock, so we’re keeping our stops appropriately wide on this one. For even bigger potential upside, I recommend the July $100 calls (VIQ-GT).

PORTFOLIO UPDATE

Six out of eight positions in our portfolio are profitable and we are well-positioned to benefit from the continued strength of global markets. Our single "hedge" against a downturn is the Japanese Yen ETF (FXY).

Both Irish biotech play ICON plc (ICLR) and Millicom International (MICC) will announce earnings before the market opens tomorrow morning. Our Latin American cell phone play NII Holdings Inc. (NIHD) will do the same on Thursday. We’ll hold off on taking profits on some of our existing positions until these results come through.

Investment bank Morgan Stanley initiated coverage of mining giant CVRD (RIO) last week with an overweight rating and $50 price target. That target is almost a 20% upside from the stock’s current price. So hold on for the ride.

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