TAKING STOCK: VimpelCom

Dear Mr. Berko: I heard about an emerging-market company called VimpelCom, which is in the cellphone business in Russia, Africa and Asia. A broker I know is very enthusiastic. It is $10.25 a share and yields 14 percent, and it's profitable. What do you think of this stock? I would like to buy 500 shares. FD, Kankakee, Ill. Dear FD: Emerging-market companies are like Fourth of July fireworks. There are always lots of preamble, advertising and impressive expectations. They make lots of noise and are awesome to watch while they're going up, but the colors fade quickly, and the banging stops. And when they come down, all that's left is the sulfuric after-stench of ignited gunpowder. Emerging-market stocks are not investments but more often rank speculations. And by the time you've been persuaded to make an emerging-market investment, the smart money has been there and gone, so you're left with the leavings. Emerging-market investing is usually a sucker's bet to provide exit strategies for Wall Street. Investing wisely in U.S. equities is tough enough, so why compound the difficulty? VimpelCom Ltd. (VIP-$10.25) is a $23.4 billion telecommunications company providing corporate and consumer mobile communications service and accessories, plus Internet service, to 220 million subscribers. Vimpel - that rhymes with pimple - is headquartered in Amsterdam, has a 58,000-employee payroll and sells its wireless services in Russia, Algeria, Kazakhstan, Ukraine, Pakistan, Bangladesh, Armenia, Tajikistan, Uzbekistan, Georgia, Kyrgyzstan, Laos, Cambodia, Central African Republic, Burundi, Zimbabwe, Italy and Canada. Wow! I'll wager that this company has a bewildering directory assistance system! I wonder what kind of algorithm it uses. I'm sure I'd never care to be a Vimpel phone customer. But I imagine that there are some folks who'd like to own a very speculative emerging-market investment. And they'd probably like to own a few hundred to a few thousand shares of VIP as an intriguing long-term gamble if they believe the $1.40 dividend, yielding 14 percent, can be maintained. Goldman Sachs, Bank of America, UBS, Morgan Stanley, Oppenheimer and Credit Suisse (none of whom I trust) suggest that VIP's dividend is safe. However, I'm mindful that these companies are actively seeking investment banking business from VIP. In fact, UBS was recently engaged to sell VIP's Canadian wireless business, and Oppenheimer is finagling to advise VIP on a $4 billion acquisition of a Russian cellular operator from a Swedish phone company. How does VIP keep its reporting on Uzbekistan apart from its Cambodian ledgers or its numbers in Bangladesh separate from its Zimbabwe accounting or manage its Pakistani revenues so it doesn't confuse the numbers with Armenia's? I can't figure out how they collate all this stuff, send it to Amsterdam and then print a VimpelCom annual report in English. Because there's so much stuff lost in translation, I question the validity of VIP's published operating margins (20.68 percent), return on equity (12.98 percent), net profit margins (9.7 percent) and book value ($9.23). But I can say with certainty that there are 16 analysts who follow VIP who have a mean target price of $12.75. And HSBC suggests a one-year target price of $16.26. VIP missed its first- and second-quarter consensus (not by much, though). Earnings have begun to slow. And its Russian subsidiary's performance has proved disappointing. Revenue growth is beginning to slow, and 2014 revenues are expected to be up less than 2 percent from 2013. Earnings have improved, but that's primarily because management has reduced expenses. In 2014, share earnings are expected to come in at $1.39, just a few pennies above 2013's share earnings of $1.37. Future revenue and earnings improvement must be fueled by acquisition of smaller players in VIP's service area, as there's little room for growth among the current population. VIP's low price-earnings ratio (it trades at eight times earnings) suggests that the shares are not aggressively priced. So if management in Amsterdam maintains VIP's $1.40 dividend, HSBC's $16.26 target price could be a reasonable objective. And a 500-share fling may be a rewarding speculation. ---------- Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com. © 2013 Creators Syndicate Inc. Published: Wed, Aug 7, 2013