Looking for Value in Russia’s Vimpel and in Pillowtex

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Before We Start ...

Jim: We figure every investor occasionally thinks about bargain hunting--you know, buying a stock priced under, say, $20 a share with the hope that if it can just rise a few bucks, you’ve got a tidy profit. It’s an especially appealing thought for folks who don’t have a lot of money for stocks.

Mike: Trouble is, these stocks are often cheap for a reason. Think of holding Western Union about the time the telephone was invented.

Jim: Or they can be companies that have temporarily hit the skids but, to the trained eye, still offer value--”fallen angels.”

Mike: So today we’re each going to offer up a cheap stock that looks like a diamond in the rough. Call it our small-cap pick of the week.

Jim: And to prove our point that values can be found, I notice that both our choices are up nicely today while the rest of the market is melting down.

Vimpel Communications (VIP)

Mike: My pick is Vimpel Communications, a Russian company that provides wireless telephone service in Russia. It’s important to note that its main market is Moscow, which I’ll come back to in a moment.

Jim: Not that Vimpel has been hiding under a bush. When it went public in late 1996, it became the first Russian company to be listed on the New York Stock Exchange, with all the appropriate fanfare.

Mike: That was during the frenzy to invest in Russia. Since then, our friend to the east has taken one heckuva tumble.

Jim: Clearly this company is a casualty of the economic crisis that hit Russia, particularly the devaluation of the ruble last summer.

Mike: Not just the devaluation. At the same time, the Russian government defaulted on its ruble-denominated debt. Now, it’s one thing for strapped governments to default on dollar-denominated debt, but since they can print as much of their own currency as they want, defaulting on domestic is something you don’t see happening very often, even among the dumbest governments.

Jim: But what effect does that have on selling cell phones in Russia?

Mike: Well, not only was Vimpelcom holding a lot of this now-worthless debt, but to the extent the government knocked the starch out of the Russian economy, it took Vimpelcom along with it. This stock went from nearly $60 a share down to $4 and change. Yet it’s lately come smartly back, and its American depositary receipts are now trading around $16. And I think there’s a story here that investors will want to hear.

Jim: You’ve got the ball, Mike. Let’s see you run with it.

Mike: To start with, Vimpelcom was founded and is still majority-owned by a gentleman named Dmitri Ziman, a former Russian military officer and a wireless-communications engineer. Old Gen. Ziman still lives in his government-provided military apartment and can still be seen on the streets of Moscow in the evening, walking his little dog. But when he comes in to the office to do business, he’s as tough as nails.

Jim: As you’d expect a Russian commandant to be.

Mike: Though you wouldn’t necessarily expect a Russian commandant to also be a smart businessman. But Ziman’s knowledge is what got foreign investors interested in helping bring Vimpelcom to the market.

Jim: That’s all well and good, but our readers want to know if they can make any money with this stock.

Mike: Now, I’m certainly not going to say that this stock is for the fainthearted. After all, what’s the percentage in investing in a company that’s dependent on Russian industrial growth?

Jim: My thought exactly.

Mike: My answer is this is not a company dependent on Russian industrial growth. It’s dependent on business activity, however it occurs, particularly in Moscow. And if you know anything about Russia, as I do having lived there, you know that whatever money comes into Russia ends up in Moscow, so the city looks beautiful while the rest of the country’s going to hell. Vimpelcom will exploit that by offering businesspeople wireless communications while the Moscow communications superstructure falls apart.

Jim: Now let’s talk about their size, just to give our readers some parameters. This company has about $300 million in annual revenue and about 125,000 subscribers.

Mike: That’s right.

Jim: And it was actually profitable until last year, when it lost about $5 million.

Mike: The major reason for that loss was not operations, but its exposure to Russian currency and to government policy.

Jim: In fact, as I understand it, just within the last month or so, it’s actually been signing up new clients fairly aggressively--by which I mean it’s had to cut prices to get a lot of those clients.

Mike: Right. The important thing to remember is that over the long term investors are not going to write Russia off. We’ve had the bust. I think we’re going to see probably five or 10 years heading toward another boom during which business activity will actually expand, particularly in Moscow. This is a company that is going to exploit that very, very well.

Jim: You know, I actually tend to agree with you. But I wouldn’t buy the stock.

Mike: Chicken?

Jim: Look, once again this comes down to an issue between us of timing. I’m hard pressed to see how a nation that can’t afford a loaf of bread these days is going to sign up en masse for cell phones.

Mike: See, you’re focusing on the wrong economy. In fact there are at least two different economies in Moscow. There’s the economy you see on news reports, of old ladies in babushkas selling potatoes on subway platforms. And there’s the dollar economy, made up of enterprises that actually do function. These often are the targets of foreign investment, or are run by foreign businessmen and government functionaries with access to greenbacks. By the way, Vimpelcom, having learned its lesson from the ruble debacle, now bills its customers in dollars.

Jim: Sorry, I see the stock just sitting there idle for another who-knows-how-many months. Since last summer, this stock basically has flat-lined, and there’s just too much risk in buying these shares. There’s political risk. There’s social risk. There’s economic risk. The list goes on.

Mike: Doesn’t that sound like fun?

Pillowtex (PTX)

Jim: Mike, my pick of the week is a lot less esoteric than yours . . .

Mike: It’s positively mundane.

Jim: Easy now. Pillowtex is a leading maker of blankets, pillows, linens, mattress pads, towels and the like. It sells to nearly every department store and mass merchandiser in the country, like Target and Wal-Mart, which resell its products under the stores’ private labels. This company, which is headquartered in Dallas, really jumped in size in mid-’97 when it bought one of its rivals, Fieldcrest Cannon, maker of Cannon towels and so forth. Now the company has about $1.5 billion in sales.

Mike: My main question to you, Jim, is whether you see the same extremely disquieting thing in this company that I do? That is, I’m looking at a company that has proved consistently and horribly unable to manage growth.

Jim: Not an unfair statement. You’re absolutely right; this company has not provided stockholders with a good night’s sleep for a long time. The stock’s dropped about 60%, a wipeout, over the last 12 months. But hold on: In just the last two weeks, this stock has jumped from $12 to nearly $17--that’s a 40% gain in just 14 days. And it’s still selling for just six times earnings.

Mike: Hmmm. From a certain standpoint that might look pretty cheap.

Jim: That’s not all. They’ve already announced that their earnings will come in short in the first and second quarters of this year. They’re also debt-heavy, in part because of these acquisitions. Boy, this is a classic down-and-out stock, wouldn’t you say?

Mike: Unless it’s a classic down-and-goin’-down stock. I know there are people out there who think, gee, the market has overreacted to a series of disappointments and things are going to get better.

Jim: I think they will.

Mike: But the consistency I see in this company is that over and over again it seems to be surprised by what’s required to provide its customers--meaning the large department stores--with product. Every time they wake up and say: “Whoops! We have to retool our looms more than we thought, and excuse us, there’s been significant disruption.”

Jim: I won’t even quibble with you about that, and I think Pillowtex’s executives have not managed the growth of this company well. But having said that, I still think I’d buy this stock. This is an industry leader. Its sales growth is holding up pretty well.

Mike: It’s just not making money.

Jim: It’s just not making money.

Mike: That’s not a good sign.

Jim: You’re looking at the past. I’m looking forward.

Mike: And now, of course, they’re gonna borrow more money to buy back some of their shares. This is a great operation.

Jim: Come on, their basic business is strong. Either the current management or, fairly soon, new management, will turn this boat around, because I don’t think the investors in this company are going to stand for this much more. I mean, after you’ve lost 60% of your money . . .

Mike: In other words, this is a management that actually has been very good at turning a mid-cap stock . . .

Jim: . . . into a small-cap stock, I know. And I wouldn’t be a bit surprised if some new management was brought in to make some changes fast.

Mike. Fair enough. That makes Pillowtex a play on the authority of the board of directors.

Jim: No, one way or the other, this company will continue to slash away at costs, because that seems to be really their only problem. If they can get their costs down, their earnings will zoom, because the sales are still strong.

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Write or e-mail with a stock you would like to see discussed in this column. Times staff writer James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Times staff writer Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment. Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

Vimpel Communications

Monday: $15.69

Pillowtex

Monday: $16.75