Brazil’s Telebras a New Darling of Wall Street

With telephone stocks accounting for more than a fifth of the total market capitalization of the publicly listed companies in Latin America, it’s no surprise that stocks in the region’s single biggest industry are among the favorites of Wall Street.

Investors can be forgiven for being skeptical. From Mexico to Argentina, many of the Latin American telecommunications stocks peddled based on their “huge” growth potential have soared only to fall to earth later on.

In the five years since Telefonos de Mexico was listed on the New York Stock Exchange, the shares have returned 37%, well below the 107% total return for the Standard & Poor’s 500 index during the same period. Moreover, Telmex trades at $34.625, down from its high of $74.375 reached in February 1994.

The devaluation of the peso and aggressive expansion into Mexico by AT&T; Corp. and others has dimmed enthusiasm for Telmex, but Wall Street has a new darling in Telecomunicacoes Brasileiras, Brazil’s telephone monopoly.

Shares of Telebras have returned almost 32% so far this year including dividends, and some Wall Street analysts think the shares could rise that much again within the next 12 months.

“The shares are among the cheapest relative to their earnings potential,” said Paulo Vasconcellos, a Sao Paulo-based analyst with Merrill Lynch & Co.

Encouraged by strong first-quarter earnings, Vasconcellos last week raised his rating on the Brazilian telephone company to long-term “buy” from “accumulate,” and Merrill selected Telebras as its “global focus stock” best bet for the week.

The better-than-expected earnings caught the attention of others as well, prompting analysts at Oppenheimer, Bear Stearns and Robert Fleming to reiterate “buy” recommendations on the stock.

Vasconcellos predicted that the shares, currently trading at $61.25 on the New York Stock Exchange, could gain more than 30% to reach $80 within a year. The analyst raised his earnings estimates for 1996 by 47% to $6.18 per share and by 36% to $7.45 per share for 1997.

Telebras shares remain vulnerable to swings in politics that could undermine the government’s anti-inflation plan and thereby roil the stock market and Telebras, which accounts for more than half the daily turnover on the Sao Paulo exchange, said Jose Linares, an analyst at Oppenheimer.

Still, there are three reasons Telebras may be worth the risk: The shares are cheap, the growth potential is large and the Brazilian government appears to be slowly getting its program to sell state-owned assets on track.