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Monday, April 2, 2007

Millicom (MICC) - more growth on the way

Millicom International Cellular S.A. (MICC) provides cell phone service worldwide, especially in developing countries. Headquartered in Luxembourg, Millicom focuses on offering prepaid cell phone services across 15 countries including El Salvador in Central America; Paraguay in South America; Chad, Ghana, and Tanzania in Africa; Sri Lanka in south Asia; and Cambodia and Laos in Southeast Asia. These may not be on the top of your list of vacation spots but they are rapidly growing markets for cell phones. Rather than spending millions to deploy land lines, why not install some towers and sell prepaid cards and cell phones? Millicom has developed a sweet business model.

How good is their business model? How about quarterly revenue growth of 85% year-over-year, gross margin at 72.5% and operating margin at 27.8% and return on equity of 61%? This kind of growth is only available in emerging markets and that is the specialty of Millicom. Whereas cell phone penetration in places like the US and Europe ranges from 70% to 100%, only three out of ten people in developing countries has a cell phone. Clearly, there is room for further growth.

So is there a down side? Well, Millicom has a high trailing PE ratio, over 48; however, the forward PE is only about 16 so strong growth is expected. It can be a volatile stock: it sports a beta of about 5.25, good for traders but nerve wracking for buy-and-hold investors. On the other hand, there has been a solid up-trend in place since last July and, though the stock has bounced around some, it has basically stayed above its 20, 50 and 200 day moving averages pretty much the the whole time. Take a look at the chart below.

Click chart to view larger image

In summary, Millicom is taking advantage of a red-hot global trend. The rapid adoption of mobile phones in developing markets is aided by favorable demographics. These markets teem with teenagers and no age group has taken to mobile phones more than those who are under 25. Millicom's competitors are justifiably jealous. China Mobile attempted to buy them out last year but the deal fell through because China Mobile wouldn't offer what Millicom's management felt was a reasonable price. Last quarter's blowout numbers prove that premium valuation was well deserved. Look for Millicom to continue its winning ways.

Note: In looking for a stock that would qualify for the CNBC Million Dollar Portfolio contest I turned to the Zacks stock screener (find links to this and other screeners on the Trade Radar Investor Toolbox page). I set up a simple search for stocks with a market cap over $500M and a beta over 5. The high beta was chosen in the hopes that the corresponding volatility will be on the upside. Of the half dozen stocks that popped out I felt that the one with the most potential was Millicom.

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