This Just In: More Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.

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At least one banker managed to stir itself off the couch and offer us a couple words of advice Friday: UBS.

Long an active player in the Russian equities market, the Swiss banker made a couple of significant moves in the telecom space last week. First, it downgraded Vimpelcom (NYS: VIP) from "buy" to "neutral." Then, in swift seesaw motion, UBS switched its support to Vimpel's archrival, Mobile TeleSystems (NYS: MBT) , upgrading it from "neutral" to "buy." But why?

An excellent question
Unfortunately, I'm afraid my guess is as good as yours on that one. You see, while our good friends at confirm for us that these twin downgrades/upgrades did indeed take place, no one seems quite sure why it was that UBS made its moves Friday.

The new ratings don't seem tied to performance -- because both MTS and Vimpel have underperformed the Dow Jones Industrial Average (INDEX: ^DJI) by about equal amounts over the past year. Both sport nearly identical P/E ratios in the low 11-12 range. SI notes that MTS shares are currently sitting in the middle of their trading range, but the same thing could be said for Vimpel.

And the answer might be...?
One factor that may put MTS ahead in this competition is its generous dividend yield. When I interviewed MTS CFO Alexey Kornya earlier this year, he told me of MTS' strong commitment to paying "one of the best" dividend yields in all of Russia. And indeed, according to data from S&P Capital IQ, MTS does pay a pretty nice yield. Even if its dividends aren't quite as much as the 9%+ dividend checks that Telefonica (NYS: TEF) and New Zealand Telecom (NYS: NZT) mail out every year, MTS at least pays on par with the rates U.S. investors would receive from the likes of Verizon (NYS: VZ) or AT&T (NYS: T) .

And yet, according to Capital IQ, even this answer doesn't quite work. While dividend yields can fluctuate from quarter to quarter, and be thrown off by lump sum payouts and other one-time events, right now, the Fool's favorite data provider is telling us that Vimpel actually offers a 7% dividend -- one full point ahead of what MTS pays!

Back to basics
Be that as it may, I do still agree with UBS' preferring MTS over Vimpelcom, and I'll tell you why: valuation.

You see, while these two firms look very similar on the surface, it doesn't take much digging to discover why MTS is the superior business. MTS generates $1.3 billion in annual free cash flow, versus $2 billion for Vimpel. But because MTS does this while shouldering a smaller debt load than its rival, MTS actually sports an enterprise value of barely half Vimpel's. A $21 billion enterprise value, versus Vimpel's $41 billion.

Foolish final thought
Once you figure that out, the math here really isn't that hard -- and neither is it hard to figure out why UBS prefers MTS over Vimpel. A $21 billion market cap, earning $1.3 billion cash-profit per year, gives you a 16 EV/FCF ratio for MTS. That right there suggests it's a better bargain than the 20 EV/FCF at Vimpel. And while I'd argue that Vimpel's superior dividend yield makes that company a decent deal at today's prices, in the end, I agree with UBS:

MTS' 16 EV/FCF, 14% projected growth rate, and 6% dividend yield make the stock a better buy.

More interested in making steady profits than plowing through EV/FCF calculations in search of value? Fair enough. I know it's not for everyone. If you're looking for a simpler way to invest, The Motley Fool has you covered there as well. Read our new -- and free! -- report on3 ETFs Set to Soar During the Recovery. No math required.

At the time thisarticle was published The Motley Fool owns shares of Telefonica, but Fool contributorRich Smithdoes not own shares of, nor is he short, any company mentioned above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 299 out of more than 180,000 members. The Motley Foolhas adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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