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Estimates have been rising for Telecom Argentina (TEO - Snapshot Report) after the company delivered strong Q1 results driven by better than expected mobile revenues. It is a Zacks #2 Rank (Buy) stock.

Analysts are projecting solid earnings growth over the next two years. With a fat dividend and shares trading at just 9x forward earnings, TEO offers a lot of total return potential.

Company Description

Telecom Argentina holds a license to provide fixed-line telecommunications services in Argentina. It also provides mobile services through Personal, a wholly owned subsidiary, and Nucleo in Paraguay.

The company is headquartered in Buenos Aires, Argentina and has a market cap of $4.6 billion.

First Quarter Results

On May 2, TEO reported first quarter earnings per share of 78 cents, crushing the Zacks Consensus Estimate of 64 cents. It was a 44% increase over the same quarter in 2010.

Net revenues jumped 27% driven by better than expected mobile revenues as the number of mobile clients rose 14% to 16.9 million. The broadband segment was also a big growth driver in the first quarter as the broadband subscriber base jumped 14% to 1.4 million.

The gross margin expanded from 50.2% of sales to 52.3% in the first quarter. Meanwhile, operating income before depreciation and amortization was up 25%.

Solid Growth Ahead

Estimates moved higher off the strong quarter, sending the stock to a Zacks #2 Rank (Buy).

Analysts are projected solid growth for TEO over the next two years. The Zacks Consensus Estimate for 2011 is $2.60, representing 10% growth over 2010 EPS. The 2012 consensus estimate is 5% higher at $2.74.

Fundamentals

Telecom Argentina generates strong cash flow and has been rewarding shareholders with some fat dividends lately. After a 9-year hiatus, the company began paying a dividend again in 2010.

Its dividends have been lumpy, however. It paid 90.4 cents per share in April 2010, 46.5 cents in December 2010 and $1.15 per share in April 2011.

It currently yields a juicy 6.7%.

Valuation looks attractive for TEO, with shares trading at just 9.0x forward earnings, a significant discount to the industry average of 14.5x.

Conclusion

As the mobile and broadband segments continue to drive earnings higher, expect Telecom Argentina to continue paying out attractive dividends. With estimates rising and a forward P/E in the single digits, investors have a lot of upside potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

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