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Mexican Phone Stock Is Expected to Get Even Hotter

Wall Street loved Telefonos de Mexico, the Mexican phone company, when it was a penny stock. Now it’s a penny stock and a Big Board stock, and investors still can’t seem to get enough of either.

While some investors worry that the stock’s 180% rise this year is overdone, many analysts who understand the dynamics of the Mexican stock market believe that TelMex is just in the early stages of its advance. The company epitomizes the re-energized Mexico that has caught the attention of investors worldwide.

Mark Fane, a Mexican-stock analyst with the firm of Charles M. Blair & Co. in Los Angeles, sees the Mexican market entering a new phase. The initial “hot” money that powered the market’s 500% surge from 1987 to late 1990 is leaving for other emerging world markets that may be where Mexico was two years ago--for example, Brazil’s Sao Paulo exchange or Argentina’s Buenos Aires bourse, Fane says.

In the place of hot money, “We’re starting to see more conservative investors come into Mexico now,” such as U.S. pension funds, Fane says. They’re fueling a new bull cycle, attracted by the gains the Mexicans have made in moving their economy away from government control and toward fully free markets. Inflation has plunged, the economy is strong and entrepreneurs are hungrily buying up state-run businesses.

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TelMex is playing a crucial role in Mexico’s transition, because the country can’t be modernized without a worthy communications system. And when foreign investors eye TelMex, they see a company whose earnings doubled last year alone as it made phone service accessible to more Mexicans.

So despite the stock’s 180% jump since year-end, TelMex still is a compelling value, its American promoters argue. Fane estimates that the stock still trades for less than 10 times 1991 earnings per share. Rod Linafelter, money manager at Berger Funds in Denver and a TelMex shareholder, says flatly: “There aren’t many places where you can find a utility with this kind of growth rate.”

Two classes of TelMex shares trade in the United States: One issue trades on the NASDAQ electronic market; the newer issue, launched in May, trades on the New York Stock Exchange.

The TelMex shares on the NASDAQ market closed at $1.84 each Thursday. The NYSE TelMex stock closed at $37.25. The differences between the two are explained in the accompanying box, but basically, one NYSE share is equivalent to 20 NASDAQ shares--hence the price difference.

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Which is the better way to own TelMex? It doesn’t matter, most analysts stress. The general feeling is that TelMex eventually wants to have its NASDAQ shareholders convert their shares to NYSE shares because of the higher visibility and liquidity of the NYSE listing. “But I don’t really think they (TelMex) are that concerned about it,” says Adam Holiber, vice president at D. A. Campbell Co., an L.A. firm that specializes in Mexican stocks.

The NASDAQ TelMex owners had a chance to convert 20-for-1 free of charge until last week, and plenty obviously chose not to do so. Many of those NASDAQ investors no doubt like the idea of keeping a low-priced bet on Mexico’s rebound.

Any worries that the NASDAQ shares might be left behind by the NYSE shares have proved groundless. The NYSE shares were sold for $27.25 a share in May and have risen 37% since then. The NASDAQ shares were trading for $1.36 each when the NYSE stock was sold and are up 36% since. The difference isn’t significant.

The bottom line is that the two stocks are essentially indexed to one another by the 20-to-1 conversion ratio, so they just about have to move in lock-step--up or down--with the underlying TelMex shares that trade in Mexico City.

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How high can TelMex go? Berger Funds’ Linafelter believes that a fair value would be in the mid-$40s for the NYSE shares in the near-term. If the stock is going to $45, it has another 20% move ahead of it. Over the longer term, it should be worth a lot more than that, if Mexico’s story only continues to get better.

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TelMex: NYSE vs. NASDAQ

Background on the two U.S. stock classes of TelMex, the Mexican phone company:

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* Each TelMex share trading on the NASDAQ electronic market (over-the-counter) represents one “A” series TelMex share trading in pesos on the Mexico City Bolsa, or stock exchange.

* Each TelMex share trading on the NYSE represents 20 “L” series TelMex shares trading in pesos on the Bolsa.

* The A series shares have voting rights; the L series shares don’t. Other than that, it’s all basically the same stock.

* The same goes for the NASDAQ and NYSE shares--they’re the same thing, except that you’re essentially buying 20 TelMex shares in Mexico City with each NYSE share, versus a one-for-one deal with the NASDAQ shares. So naturally, the price of the NYSE stock is always going to be about 20 times the price of the NASDAQ stock.

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* The NASDAQ shares came first: They began trading in 1986 in TelMex’s initial foray to attract U.S. investors. The NYSE shares began trading in May.

* You’ll find the NASDAQ TelMex stock in the NASDAQ Bid and Ask table of The Times, not the NASDAQ National Market System table.


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