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WALL STREET, CALIFORNIA | Stock Exchange: James Peltz
and Michael Hiltzik

Looking for Value in Russia's Vimpel and in Pillowtex

April 20, 1999|JAMES PELTZ and MICHAEL HILTZIK

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Before We Start ...

Jim: We figure every investor occasionally thinks about bargain hunting--you know, buying a stock priced under, say, $20 a share with the hope that if it can just rise a few bucks, you've got a tidy profit. It's an especially appealing thought for folks who don't have a lot of money for stocks.

Mike: Trouble is, these stocks are often cheap for a reason. Think of holding Western Union about the time the telephone was invented.

Jim: Or they can be companies that have temporarily hit the skids but, to the trained eye, still offer value--"fallen angels."

Mike: So today we're each going to offer up a cheap stock that looks like a diamond in the rough. Call it our small-cap pick of the week.

Jim: And to prove our point that values can be found, I notice that both our choices are up nicely today while the rest of the market is melting down.

Vimpel Communications (VIP)

Mike: My pick is Vimpel Communications, a Russian company that provides wireless telephone service in Russia. It's important to note that its main market is Moscow, which I'll come back to in a moment.

Jim: Not that Vimpel has been hiding under a bush. When it went public in late 1996, it became the first Russian company to be listed on the New York Stock Exchange, with all the appropriate fanfare.

Mike: That was during the frenzy to invest in Russia. Since then, our friend to the east has taken one heckuva tumble.

Jim: Clearly this company is a casualty of the economic crisis that hit Russia, particularly the devaluation of the ruble last summer.

Mike: Not just the devaluation. At the same time, the Russian government defaulted on its ruble-denominated debt. Now, it's one thing for strapped governments to default on dollar-denominated debt, but since they can print as much of their own currency as they want, defaulting on domestic is something you don't see happening very often, even among the dumbest governments.

Jim: But what effect does that have on selling cell phones in Russia?

Mike: Well, not only was Vimpelcom holding a lot of this now-worthless debt, but to the extent the government knocked the starch out of the Russian economy, it took Vimpelcom along with it. This stock went from nearly $60 a share down to $4 and change. Yet it's lately come smartly back, and its American depositary receipts are now trading around $16. And I think there's a story here that investors will want to hear.

Jim: You've got the ball, Mike. Let's see you run with it.

Mike: To start with, Vimpelcom was founded and is still majority-owned by a gentleman named Dmitri Ziman, a former Russian military officer and a wireless-communications engineer. Old Gen. Ziman still lives in his government-provided military apartment and can still be seen on the streets of Moscow in the evening, walking his little dog. But when he comes in to the office to do business, he's as tough as nails.

Jim: As you'd expect a Russian commandant to be.

Mike: Though you wouldn't necessarily expect a Russian commandant to also be a smart businessman. But Ziman's knowledge is what got foreign investors interested in helping bring Vimpelcom to the market.

Jim: That's all well and good, but our readers want to know if they can make any money with this stock.

Mike: Now, I'm certainly not going to say that this stock is for the fainthearted. After all, what's the percentage in investing in a company that's dependent on Russian industrial growth?

Jim: My thought exactly.

Mike: My answer is this is not a company dependent on Russian industrial growth. It's dependent on business activity, however it occurs, particularly in Moscow. And if you know anything about Russia, as I do having lived there, you know that whatever money comes into Russia ends up in Moscow, so the city looks beautiful while the rest of the country's going to hell. Vimpelcom will exploit that by offering businesspeople wireless communications while the Moscow communications superstructure falls apart.

Jim: Now let's talk about their size, just to give our readers some parameters. This company has about $300 million in annual revenue and about 125,000 subscribers.

Mike: That's right.

Jim: And it was actually profitable until last year, when it lost about $5 million.

Mike: The major reason for that loss was not operations, but its exposure to Russian currency and to government policy.

Jim: In fact, as I understand it, just within the last month or so, it's actually been signing up new clients fairly aggressively--by which I mean it's had to cut prices to get a lot of those clients.

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