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Bells Are Ringing All Over The World


GLOBAL MARKETS

BELLS ARE RINGING--ALL OVER THE WORLD

"The telecommunications revolution promises to transform world economies as the automobile did 100 years ago and the steam engine 200 years ago."

--Donald H. Straszheim, Merrill Lynch & Co. chief economist, Dec. 6, 1993

As anyone who just got a fiber-optic line hooked up in Bangkok, Berlin, or Mexico City will tell you, a telecommunications revolution really is under way. This revolution is doing a lot more than making communications easier for businesses and consumers. It's also opening up some of the most intriguing global investment opportunities in years.

Forget multimedia and 500-channel cable TV for the moment. We're talking basic telephone calling. Indeed, in a time of low global interest rates and falling technology costs, everyone from giant Tel fonos de M xico and British Telecom PLC to Russia's tiny Petersburg Long Distance (page 97) is scrambling to update service and bring new telephones to millions of emerging-market consumers. For investors, these efforts are likely to yield rising dividends and annual per-share earnings growth rates of 15% to 20% or more.

BARGAINS. Such growth predictions help explain why TelecomAsia, a fledgling carrier with a franchise to build 2 million phone lines in Bangkok, rocketed to 83 times earnings as soon as its recent initial share offering hit the Thai stock market. But you don't have to pay anywhere near that to get into the phone game. For every TelecomAsia, there are plenty of well-managed companies offering modest price-earnings ratios and high growth potential. Take Italy's phone monopoly, STET, which offers "huge unachieved values," says Salomon Brothers Inc. analyst Richard Ryder. He thinks STET may be ready to jump from its current $2.25 a share to $3.80 in coming months.

Emerging economies also offer bargains. Consider Telmex. Through much of 1993, it was dogged by an economic slowdown, jitters over the future of the North American Free Trade Agreement, and government pressure to hold down local rates. Yet with NAFTA now passed and Mexico's economy likely to benefit broadly, analysts figure that Telmex has only now begun to live up to its potential.

Mexico has just 8 phone lines for every 100 residents, compared with 55 per 100 in the U.S. But it's adding new ones at a rate of 12% per year--823,000 in 1993 alone. Revenues generated by that expansion should keep money rolling in for the rest of the decade. In fact, Lehman Brothers Inc. Senior Vice-President Marianne G. Bye thinks Telmex is already so flush with cash that it will boost its dividend 60% in 1994, after raising it 88%, to 98 a share, in 1993. "You cannot go wrong with a company that sells for 10 times earnings and has profit growth of 15% a year," agrees Oscar A. Castro, portfolio manager of the Montgomery Global Communications Fund. "It's one of the cheapest telecom stocks in the world."

FAST TANGO. Much the same can be said for other such Latin offerings. Bye, for example, also likes Telecom Argentina, part of the country's former state monopoly. Now partly owned by two European phone giants, France T l com and Italy's STET, it has been shedding staff while expanding the number of its lines by 10% a year. As a result, Bye figures, earnings should be up some 20% in 1994. She and others are also enthusiastic about Brazil. Sonia Villalobos of S o Paulo's Banco de Investimentos Garantia, for example, is high on her city's local carrier, Telesp. Among Brazil's eight publicly traded phone companies, she says, "it has the most potential by far." Serving Brazil's commercial hub, which generates 40% of the country's gross domestic product, Telesp is retiring high-cost debt and recently entered the cellular-phone business. As a result, Villalobos expects its profits to jump 40% in 1994.

Latin America is hardly the only region offering phone bargains. Rob Collins, head of research at Bangkok's First Asia Securities, recommends United Communications Industry (UCOM). A Thai cellular-phone operator, UCOM's shares fetch a p-e ef 37, half that of its main competitor, Advanced Information Services. But others favor more mainstream Asian choices, including Hong Kong Telecommunications. Its American depositary receipts (ADRs) have slipped 10% in recent weeks, to 60, amid concerns over the entry of several local competitors in 1995. But HKT is being allowed to keep its lucrative monopoly on calls to China and other destinations for 11 more years. It also will be a prime contender to rewire China's phone system. "They will dominate the area well past the year 2000," argues Salomon's Ryder.

Is Hong Kong still too exotic for your taste? Try Britain's Cable & Wireless PLC. Another popular ADR issue, it owns 57.5% of Hong Kong Telecom and is seeing rapid growth both in Britain and the Caribbean.

Or forget about phone companies altogether. Instead, buy shares of companies that supply telecom equipment and software. That's what Udi Gelbard, director of research at Oscar Gruss & Sons Inc. in Tel Aviv, is doing. He recommends Comverse Technology, a maker of data-compression systems developed for the Israeli intelligence service. Denver money manager Bruce B. Bee, meanwhile, is accumulating shares in Benefon, a Finnish maker of cellular-phone gear whose sales are thriving in Asia, Eastern Europe, and Turkey. And Theresa M. Murphy, a managing director at Smith Barney Shearson Inc., is high on Canada's Newbridge Networks Corp., which makes digital switches that let corporations operate voice and data networks over long distances. Murphy predicts that Newbridge's earnings will more than double in 1994, to $1.43 a share.

Looking for more choices? Denmark, the Netherlands, and Germany plan big phone privatizations. And more Latin offerings are on the way. In the global telecom market, it's clear there won't be any shortage of picks for a long time.William Glasgall in New York, with Ken Stier in Bangkok and Neal Sandler in Jerusalem


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