Zacks.com: Analyst Blog

We are keeping our current Buy recommendation on Telemig Celular Participações S.A. (TMB). We still believe the stock remains attractively priced, in light of the company's strong third quarter results and the positive short-to-medium-term outlook.

We were particularly encouraged by Vivo's (VIV) announcement that it plans to acquire Telemig. We believe Telemig's valuation will converge to that of Vivo in the upcoming quarters, and that in the medium-term Telemig will merge into Vivo.

Competition remains fierce and could continue to undermine operating margins in the near future. The economic environment is much improved, but the Brazilian economy can be very volatile, particularly during periods of uncertain economic environment in the U.S. Despite the growth of the wireless sector, this industry is very competitive. Competition is already having a negative effect on operating margins. A less benign monetary policy in Brazil is a source of concern.

Presently, the stock trades around 10.6x its 2008 earnings estimates, well is below the industry median. It also trades at 3.4x its enterprise value (EV)/2008 estimated EBITDA, well below other Brazilian wireless companies like Tim Participações (TSU). If compared to other international wireless operators outside Latin America, TMB seems to be even more undervalued.

We believe TMB deserves a higher valuation as a result of the reasonable results during 2007. Additionally, the acquisition as announced some months ago by the chairman of Vivo is highly encouraging. All considered, we believe TMB has a considerable short-term upside potential. Our target price is US$79, which is based on an EV/2008 estimated EBITDA multiple between 4.5x and 5x, with an EV/EBITDA closer to that of Vivo and Tim Participações.

Read the full analyst report on TMB.

Read the full analyst report on VIV.

Read the full analyst report on TSU.