Turkcell: A Telecom at the Crossroads of Powerful Macro Trends

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Before falling to the Turks in 1453, Constantinople was known as the Queen of Cities across Europe and the Middle East. No other city in the world could match its culture, sophistication and economy. The city sat at the intersection of the Mediterranean and the Black Sea, the West and the East, Europe and Asia. It was the axis around which the known world spun.

Modern Istanbul lacks the economic clout of a New York, London or Hong Kong — for now. But as it did in its former days of grandeur, Turkey finds itself at the center of several very powerful forces. That bodes well for stocks that call the nation home — including my top pick for the best stock of 2012, Turkcell Iletisim Hizmetleri AS (NYSE:TKC), a mobile phone operator more commonly known just as “Turkcell.”

Why Turkey, and why now? Well, it is the bridge between a wealthy but economically distressed Europe and a poor but growing Middle East. It has a customs agreement with the European Union, but it also is an emerging economic and political leader in the Islamic world. And while much of the Islamic world — as well as non-Muslim developing countries like Russia and China — still is struggling through the painful transition from autocracy to democracy, Turkey is a good 20 years ahead of the pack and more politically stable.

The “BRIC” countries of Brazil, Russia, India and China might get most of the press, but Turkey has one of the brightest futures among emerging market contenders. Turkey has a younger population than any of the BRICs save India, yet fertility rates recently have fallen to Western levels. This puts the country in a demographic sweet spot for falling inflation and rising real consumer spending growth for decades to come.

Of course, the downside to being at the crossroads of Europe and the Middle East is that Turkey finds itself sandwiched between the two most problematic regions of the world. Europe is struggling to contain its sovereign debt crisis, and the Middle East has been wracked by social revolution and the threat of war against Iran.

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Not surprisingly, Turkish stocks have taken a beating. The MSCI Turkey Index as measured by the iShares MSCI Turkey Index Fund (NYSE:TUR) is down nearly 50% since October 2010, and off about 30% since summer 2011 as of this writing.

If you believe, as I do, that Turkey has one of the brightest futures of any country on the planet, then the crises on Turkey’s borders should be viewed as a phenomenal opportunity to buy shares of some of Turkey’s finest companies. And my choice for 2012 is Turkcell.

It’s been a rough year for Turkcell shareholders. Actually, it’s been a rough several years. The share price is barely a third of its pre-crisis level, and earlier this year it came close to falling below its 2008 meltdown lows. Investors fleeing the volatility of Europe and the Middle East have had little use for a Turkish blue chip like Turkcell.

Their loss is our gain. There is no object more essential to life in the modern world than the mobile phone, and Turkcell is the dominant wireless carrier in Turkey with a 54% market share. And while mobile phones are ubiquitous in Turkey, the overall market is far from saturated. Market penetration is at about two-thirds of the European average. And smart phones, with their lucrative data plans, represent only 10% of Turkish cell phone users.

Turkey, while the biggest, is far from Turkcell’s only market. The company also is a major player across Eastern Europe and the Middle East, and Turkcell is the market leader in five of the nine countries in which it operates. The key to take away from this is that telephony still is a growth industry in most emerging markets, and Turkcell is a fine company in a great position to profit from that growth.

In Turkcell, we have:

  • A world-class company with a dominant market position in a dynamic emerging economy.
  • A company that sells service that has become a basic necessity for both consumers and businesses — meaning that it is recession-resistant.
  • Great opportunity for growth.
  • A direct play on the Turkish consumer.

Turkcell also is a conservatively financed company. The company has no net debt, and a third of its balance sheet is cold, hard cash. Turkcell has $3.73 per share in cash; not bad considering the stock price is currently less than $12.

Skeptical investors might well be wondering: What’s the catch?

If investing were this simple, it wouldn’t be fun. Turkcell’s board of directors has had an on-again, off-again power struggle between two shareholder groups that reached a boiling point earlier in 2011. The company missed its dividend payment, not because it couldn’t afford it (it most assuredly could), but because the board couldn’t stop bickering long enough to approve it. Markets hate uncertainty, and the uncertainty plaguing this stock explains a fair bit of its underperformance of late.

The board situation will get fixed soon. In the meantime, life goes on, and the company continues to grow and prosper. When the dividend payment is resumed, I expect it to be in the ballpark of 5%. In the meantime, investors can buy a piece of one of the finest emerging-market telecom companies in existence trading for just 9 times expected 2012 earnings.

Disclosure: Turkcell is a recommendation of the Sizemore Investment Letter and is held by Sizemore Capital clients.  

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new special report: “Top 5 Contrarian Stocks for 2012.”


Article printed from InvestorPlace Media, https://investorplace.com/2011/12/turkcell-tkc-turkey-etf-investing/.

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