I passed on Verizon and AT&T, but America Movil is looking quite attractive at its current levels

by admin on April 10, 2013

america-movil-logoThere is no doubt that Verizon (VZ) and AT&T (T) are great companies, but at their current valuation they are far from a bargain. The P/E of Verizon  is currently at 159.9, and AT&T  is just a little cheaper at 30.92, both companies do pay a strong dividend though (Verizon 4.19% and AT&T 4.90%).  Of course Verizon is a very diversified company and that is reflected in its higher price. Verizon has a better network and among its many services, it also has FiOS, which offers them a share in the television consumption business.  If these companies were cheaper, there is no doubt that I would buy some shares, especially in Verizon given the strengths I mentioned above.  However, since the prices are ridiculously high, I decided to look elsewhere, and found a company in Latin America that is currently following the steps that Verizon is in the U.S. and it is still priced at a reasonable level.

The company is America Movil (AMOV), one of the largest integrated telcos in the world and the 3rd largest wireless operator with a 300 million accesses base, which includes 242 million wireless subscribers, 29 million fixed lines, 15 million fixed broadband accesses, and 13 million television subscribers. The company is geographically diversified with operations in 18 countries, covering a combined population of over 800 million people.  To put it in perspective, that’s twice as large as the current U.S. population.

How does this compare with the major U.S. players?  Just check out the table below.

Wireless Subscribers TV Subscribers Internet Subscribers
Verizon 111.3 Million 4.7 Million (FiOS Video) 5.4 Million
AT&T 105.2 Million 4.5 Million (U-verse) 16 Million
America Movil 242 Million 13 Million 15 Million

In terms of users, America Movil in not a small company, but in terms of market capitalization it’s not as big as its U.S. counterparts for the simple reason that things in Latin America are cheaper. America Movil pays a lot less for assets similar to those of Verizion or AT&T in the U.S. Revenues per user are also larger in the U.S. than in Latin America. While in the U.S. an unlimited data plan starts at around $100, in a country like Colombia it is only $50 for a 5GB data plan (unlimited plans are still rare in Latin America).

Market Cap Shares Outstanding Book Value Per Share Price/Book (mrq)
Verizon $141.69B 2.86B $29.97 4.25
AT&T $208.79B 5.49B $16.32 2.29
America Movil $51.09B 2.53B $6.20 3.25

Given the current levels, I prefer to invest in America Movil than in Verizon or AT&T for the following reasons:

  1. Affordable valuation
  2. Strong infrastructure for growth
  3. Repurchase share plan
  4. More diversified than U.S. companies
  5. More opportunities for growth
  6. Higher barriers to entry for new competitors

I will address these reasons below:

Affordable Valuation

Right off of the bat, when you look at the PE ratio, America Movil is more attractive than Verizon or AT&T.  As you dive a little deeper and check additional key metrics, the numbers show that the stock is, in effect, currently undervalued. The Enterprise Value / EBITDA is also the lowest of the three, the Enterprise Value multiple is important because it takes debt into account.

PE Ratio Enterprise Value / EBITDA Levered Free Cash Flow Price/Sales
Verizon 161.4 6.23 $153.1M (ttm) 1.22
AT&T 30.4 9.41 $7.95B (ttm) 1.63
America Movil 10.7 5.18 $6.09B (ttm) 1.26

Strong Infrastructure for Growth

America Movil just concluded a two-year transformational phase. During that time the company’s revenues shot up 57% and the company’s market share became more diversified. Over the past two years, America Movil has also become an integrated telecom operator in most Latin American markets. This transformation consolidated the strategic position of America Movil in the Latin American market and set them up to be able to expand their reach into new regions.

By March 2012, America Movil increased its stake in Telmex to 97.2%, a result of 60% controlling stake acquisition in 2010 and the subsequent tender offer for the remaining 40% in 2012. Although the acquisition was criticized at the time, it allowed America Movil to become a more integrated telco company. In Brazil, America Movil increased its ownership interest from 35% to 92% in Net Serviços and exercised an option that gave them control of the company. Telmex’s shares were delisted from the Mexican Stock Exchange, and its ADR program in the U.S. Telmex is now part of America Movil.

Interestingly, America Movil was once the wireless arm of Telmex. It was spun off in 2000 and rapidly grew larger than its former parent.

Repurchase Share Plan

Recently, America Movil increased its share repurchase fund by $3.2 billion. This acceleration in share repurchase may be a strategic move to safeguard America Movil’s market value, which has been hit hard by a proposed regulatory bill in Mexico. This is, however, good news for investors since earnings per share in the future will increase as a consequence of the regulation.

Although the company’s buyback policies remain in the favor of its investors, it is important to note that an increased disbursement of cash in investor returns may disrupt America Movil’s expansion policies, which currently focus on the deployment of LTE networks and the expansion of wireless data services. The size of this stock repurchase fund is a third of what America Movil is currently spending per year in development and infrastructure. I wouldn’t be too concerned about that however, since America Movil has a long-standing policy of maintaining a strong balance sheet and financial position. Its debt to equity ratio (mrq) is 2.21, much smaller than the 5.79 ratio of Verizon and right in line with the 1.95 of AT&T.

Regardless of the the event(s) that triggered this repurchase program, it shows that management is committed to their investors and respects them. You would be surprised to know how many companies are not willing or able of doing this.

More Diversified than U.S. Companies

Due to the size of America Movil and its large infrastructure in Latin America, they have been able to launch complimentary services that have helped to further diversify the company. Their overall share of wireless voice revenue is down from 73% to only 41%, while data services—fixed and mobile— now account for 36% of revenue (as compared to just 21% couple of years ago). Pay TV services, which were not a part of the America Movil portfolio two years ago, today represent approximately 8% of its service revenues. From a geographic perspective, the relative weight of Brazil jumped from 20% to 31%, nearly equaling Mexico’s. This is very important since America Movil is facing greater scrutiny from the Mexican government due to its disproportionate size in that country. In March of this year, Mexican President Enrique Pena Nieto proposed a new bill that includes several measures aimed at reforming its telecom and television industries. The main objective of this bill is to bring more uniformity and transparency into the sector and curb the concentration of power that lies with dominant players, which dictate market behavior. Currently, America Movil commands about 70% of the market share in Mexico.

This diversification in services and geographic location is key for America Movil.  As they become less and less dependent on the Mexican market, the company will become much more attractive to investors. YTD America Movil is down -12.66% due mainly to the regulatory issues in Mexico. Moving forward this will become much less of an issue as their market share grows in other regions.

More Opportunities for Growth 

The market penetration of smart phones in Latin America is still lower than in the U.S. and Europe. The main reason for this is that first generation smart phones were expensive and Latin Americans were not able to get these phones as soon as they hit the market. The advent of more device types as well as cheaper smartphones and applications will boost the demand for data services on the mobile platform in Latin America. At the same time, America Movil is the company with the best infrastructure in Latin America, and they are primed to take advantage of the rising demand for bundled services including internet access, mobile, and TV packages.  Following through with the integration of the platforms and in anticipation of what America Movil believes will be a soaring demand for data services in Latin America, they have substantially increased their capital expenditures, currently in the neighborhood of $9-10 billion per year.

Currently smartphone penetration per capita in Latin America is only 11%, by 2015 it is projected to be double that according to Credit Suisse. In the United States the smartphone penetration per capita is currently above 38%. More than half of U.S. mobile device users now own a smartphone, according to the latest comScore MobiLens data. During the 3-month average ending in September 2012, 51% of the 234 million Americans aged 13 and older using a mobile device owned a smartphone (119.3 million). Sooner, rather than later Latin America will follow this trend.

The same logic applies to paid TV penetration. The paid television penetration rate in Latin America as a whole is low at around 50% (Colombia and Argentina are the outliers with penetration rates at or above 80% similar to the U.S.).

With Internet penetration we have the same scenario, in United States the Internet penetration is at 78%, while in Latin America is 42%.

Until recently, the access to broadband services in Latin America was very limited by the relatively high cost of devices. People needed to acquire a personal computer if they wanted to be able to access the Internet and computers were expensive in terms of the income per capita in the region. Luckily, this barrier to entry for broadband services, is coming crashing down as new devices are introduced—smartphones, tablet computers, even netbooks—and selling for a fraction of what computers sold for. The expectation is that these prices will fall even further in the years to come. This means that the number of people capable of roaming the Internet will go up several times in the medium term as device prices come down. By some estimates, the number of data accesses will increase at least six times in the next five years.

Any growth in any of these three markets (mobile, Internet and pay TV) would be very good news for America Movil.

Higher Barriers to Entry for New Competitors

America Movil is funneling $9-10 billion per year for the next three years into the construction of fiber rings around the major cities in Latin America that now tie various countries together. They are also investing in the development of a submarine cable network that will allow America Movil to link the South American region and the Caribbean operations with the U.S.

This will expand the reach of America Movil’s fiber networks and increase its speed. This is another important focus of America Movil’s investment, and certainly the biggest barrier to entry for new competitors, allowing America Movil to maintain the rapid growth of its double and triple-play bundles. This has proved to be the fastest growing of its RGU net additions, with a yearly pace of approximately 50%.

America Movil has devoted part of their investment resources to the roll out of what likely will be the first “true” 4G network in Latin America, with LTE technology. Several cities in Mexico and Puerto Rico already have LTE services. Additionally, America Movil has introduced Over-the-Top boxes for their PayTV products and are developing cloud-based services throughout the region. Their focus on IT is enabling their platforms to provide all these new services and those that are still being developed.

An integrated telco with 158,000 employees distributed over 18 countries in the Americas, America Movil today is a strong competitor in its markets. The investments and acquisitions they have made over the years have provided them with a telecom infrastructure matched by no other company in the Latin American region.  With a broad mobile coverage, extensive backbone, backhaul capacity, and a PayTV platform—IPTV, cable and satellite, America Movil is capable of supporting rapid growth for years to come and represents a big challenge to new players in the region.

America Movil in my opinion is a great investment opportunity at current levels, and a much better bet than Verizon and AT&T for the reasons expressed above. Buying a leading telecommunications company at 10 PE Ratio and 5.1 Enterprise Value / EBITDA, is a pretty good deal for me.

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