VIV (Vivo Participacoes)

Vivo has a dominant position in the fast growing Brazilian wireless business.

Screening source: Reuters

Fundamentals

Zacks Research: Remaining Bullish on Vivo Shares

We are keeping our Buy recommendation on Vivo Participacoes S.A. VIV. The company has a dominant position and a strong brand in the fast growing Brazilian wireless business. Second quarter operating results were positive, and the short-term outlook remains encouraging. Meanwhile, the improvement in the Brazilian economic environment will eventually lead to Brazil being upgraded to investment grade within the next 12 months.

The acquisition of Telemig TMB, coupled with the US$5.5 billion deal in which Spain's Telefonica TEF, and some Italian financial groups acquired the control of Telecom Italia TI, is positive for Vivo in Brazil. Presently, Vivo is trading at 104x our estimated 2007 earnings, and 7.2x its enterprise value to 2007 EBITDA (a more common valuation metric for the wireless industry).

The very high P/E is a result of the low expected net income, since the company has been recovering from a difficult period. In this case, we believe it is better to analyze the EV/EBITDA ratio. We understand the current valuation of VIV is attractive if compared to Tim Participacoes TSU, its biggest competitor in the Brazilian market.

Moreover, if we analyze the price/sales ratio the stock also seems to be highly undervalued. We think that the company has a strong brand in Brazil and will be benefited by the deal involving Telefonica and Telecom Italia in Europe. Particularly encouraging has been the continued improved results. We believe in the near future the stock will trade around 8x its enterprise value (EV)/2007 estimated EBITDA, closer to the valuation of TSU.

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