TMFMmbop (97.53)

The Secret Sauce of Global Investing

May 01, 2009 – Comments (2) | RELATED TICKERS: S , MBT , DCM

I'm getting ready to teach a seminar internally here at the Fool on global investing. The first session of that seminar is slated to be a broad overview of strategy and the reading in chapter 2 and pp.83-85 and pp.145-146 of Global Investing: The Templeton Way (in case you want to follow along).

The gist of these excerpts is that the reason global investing works is because, in Templeton's view, you're looking across the entire Earth to determine where you'll get the most value for your money. You can read the book for more color, but here's how that idea works in practice.

A case study
Let's say, for example, you're interested in buying shares of a major telecom company. If you're a US-only investor and you look at comps, you'll find that average US telecom services firm is selling for a 5.5x EV/EBITDA ratio. That makes Sprint, Embarq, and US Cellular all trading for 3.5x to 4x EBITDA look pretty cheap.

But now let's hit the road and widen the scope.



As it turns out, the average major telecom company around the world is trading for 5.2x EBITDA, and the real bargains are in Argentina, Brazil, Japan, and eastern Europe. Take a look:

Company                                  Country             EV/EBITDA Ratio
Telecom Argentina (TEO)           Argentina                 2.2
Sistema                                   Russia                     2.3
Brasil Telecom (BTM)                 Brazil                      2.4
Telefonica Argentina (TAR)         Argentina                 2.8
KDDI (KDDIF.PK)                       Japan                      3.1
Mobile Telesystems (MBT)        Russia                     3.1
Turkcell (TKC)                          Turkey                      3.2
Nippon Telegraph (NTT)             Japan                      3.3
NTT DoCoMo (DCM)                 Japan                      3.3
Magyar Telekom (MTA)              Hungary                   3.3

Does this mean go and buy Argentina or Russia? No, not necessarily. Both of these countries have very meaningful stability/nationalization risks, which means telecom may not be cheap at even a little more than 2x earnings. Though I'll still buy Argentine steak whenever I have the chance:



Those risks, however, are not issues in Turkey or Japan, which is what makes Turkcell and NTT DoCoMo look so appealing to the global investor here. (Turkcell, in full disclosure, is an existing Global Gains recommendation.)

This is why Templeton supplements his advice to look for value globally with this guidance: "The numbers don't exist in a vacuum. The global investor must see the world not only in terms of P/E ratios and dividends, but as the teeming, turbulent planet-sized village that it is."

What that means
This is why Turkcell looks like a such a nice opportunity. Not only is it cheaper than its US and global peers, but it's a near-monopoly operator, has the best network in Turkey, has already invested in nationwide coverage, and has actually increased its subscriber-base with the introduction of number portability (which was supposed to make it easier for upstarts to compete). The reason it's cheap is that the market fears instability in the region, domestic political craziness, and that Turkey will prove to be more sensitive to the economic downturn that other countries. There are also some concerns that the Turkish currency (the lira) will weaken dramatically against the dollar.

These are all risks/headwinds, but they're not quite the same set of risks/headwinds that Argentina or Russia are facing. (Brazil and Japan are even less risky macroeconomically speaking, but those telecom spaces are much more competitive.)

The takeaway
If you want to be a truly successful value investor, it pays to have global perspective. And that's why we think we have an advantage over much of the market when it comes to Global Gains.

Though you may end up sticking with the US even when its valuations aren't lowest, but that will be a risk-adjusted decision...not just one you made because you weren't paying attention.

Finally, this week's Friday Night Links are coming later this afternoon. It should be a good edition.