In any diversified portfolio, it is important to not only have a portion of your assets allocated to non U.S. companies, but to also have a portion of your investments be slightly speculative in nature. Investing in companies based in emerging markets presents opportunities to not only add international exposure to portfolio, but also take on some more risk.
An emerging market is simply defined as a nation that is experiencing rapid growth and industrialization. These areas present great growth potential as the companies can literally grow with the economy of the underlying nation. Some of the most common emerging markets are countries such as China, Brazil, and India. Today, we will take a look at three emerging market opportunities from China and Brazil.
China Mobile Ltd. (NYSE:CHL) is the world’s largest mobile phone operator with about 702 million subscribers as of November 2012. The company, with a market cap over $200 billion, is one of the largest telecom companies in the world. For any company we look at, it is important to figure out if the stock is valued fairly. At first glance, it may appear that China Mobile Ltd. (NYSE:CHL) might be a little bit over valued at the moment as the company currently trades at 2 times price/book and 2.5 times price/sales, both greater than competitors.
However, China Mobile Ltd. (NYSE:CHL) truly shines in an area that I personally weigh heaviest when determining the value of a company — cash flow. China Mobile currently trades at an extremely discounted 5.9 times cash flow. The company also sports an 18.5% free cash flow yield (percentage of free cash flow in relation to revenue). This shows that China Mobile Ltd. (NYSE:CHL) is extremely effective at cash management as well as designing and implanting efficient operating procedures.
This low valuation most likely reflects the current sentiment that China Mobile’s growth doesn’t have much space to run as it already calls nearly 70% of China’s population as its customers. However, growth doesn’t have to be domestically or even come from new customers. China Mobile Ltd. (NYSE:CHL) currently has a joint venture in Pakistan with eyes on expanding to other developing nations in Asia. Also, there is the potential for China Mobile to “up sell” current customers by building out 3G and 4G options, something the company is heavily invested in at the moment.
As with most telecoms, China Mobile Ltd. (NYSE:CHL) pays an attractive dividend. The trailing twelve months’ dividend yield is 3.8% with a payout ratio of just 39%. With a beta of just 0.09, China Mobile Ltd. (NYSE:CHL) has an extremely low volatility in relation to the rest of the market.
One-two punch courtesy of Brazil
Our final two companies come from from Brazil. The first company we are going to analyze is Telefonica Brasil SA (ADR) (NYSE:VIV), which is the parent company for Vivo (NYSE:VIV) (I am going to refer to the company as Vivo for simplicity), is the second largest telecom in Brazil.
In terms of valuation, Vivo currently trades at a significant discount in relation to its competitors. The company currently trades at 14.2 times trailing twelve month’s earnings, 1.3 times price/book, and 0.6 times price/sales, all of which are below the industry average. In terms of cash flow, Vivo is once again ahead of its peers. The company currently has a free cash flow yield of 15% and trades at just 7.5 times cash flow per share. Vivo is also about 10% off of its 52-week high and is priced well for entry.
As with most telecoms, Vivo pays a hefty dividend of $1.54 per share, which yields just under 6%. Also, with a payout ratio of 48%, the current dividend is not going to be threatened by short-term revenue/profit fluctuations.
Our last emerging market opportunity comes from the Brazilian state-run oil giant Petroleo Brasileiro Petrobras SA (NYSE:PBR). The most attractive part of Petroleo Brasileiro Petrobras SA (NYSE:PBR) is its valuation. The company currently trades at just 6.8 times 2013 earnings with a price/book ratio of 0.8, both below the industry average. Petroleo Brasileiro Petrobras SA (NYSE:PBR) is also nearly 30% off of its 52-week high and looks like it has hit the floor, and is now starting to rebound.
Petroleo Brasileiro Petrobras SA (NYSE:PBR)’ Q1 2013 results were very promising, as the company reported a profit of 7.69 billion reais above forecasts for 6.7 billion, and was subsequently upgraded to Buy from Neutral by Merrill Lynch. One area where I would very much like to see improvement from Petroleo Brasileiro Petrobras SA (NYSE:PBR) is in dividend payments. The company currently yields just 0.67%, which is significantly less than other oil production companies of similar size.
Emerging markets need to be on the forefront of anyone’s mind who is trying to develop a modern day diversified portfolio. Companies from countries like China, India, and Brazil present great growth opportunities as well as much needed international exposure. It is important, however, when evaluating these companies that you do your due diligence as most companies from emerging markets should be considered speculative in nature.
The three companies above should give you a great idea as to the industries and countries you should be searching for when evaluating companies from emerging markets for your portfolio.
The article 3 Emerging Market Opportunities originally appeared on Fool.com.
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