Wednesday, July 1, 2009

Volume 3, Issue #58

Also in Today's Issue...

America Movil has almost single-handedly brought the wireless revolution to Latin America. In just nine years, penetration rates have soared from 13% to 84%. Clearly, you don't become a household name from El Salvador to the Virgin Islands without doing a few things right.

For starters, the company has spent billions to widen its territory and provide superior coverage. In Mexico, for example, its network reaches into 178,000 tiny rural communities, many of which would have no service otherwise. And it's no coincidence that since number portability was introduced (where customers can switch providers and keep their old number), America Movil's Telcel is the only Mexican carrier to gain new subscribers -- all others have seen their numbers shrink.

The firm has also beaten its rivals in rolling out advanced 3G coverage throughout the region. In fact, it's the only 3G game in town for mobile phone users in Colombia, Ecuador and Peru. As Latin America follows the rest of the world in adopting mobile broadband service, these infrastructure investments will give the firm a technological edge over its rivals.

Growth Drivers: After building a base of nearly 200 million mobile phone customers, America Movil can generate mounds of cash each year without gaining a single new subscriber. But there's no doubt that opportunities are still plentiful.

Once its foot is in the door, the company quickly makes itself right at home -- one reason why it controls a dominant 40%-plus market share. For example, a 2003 acquisition in Argentina came with 1.3 million subscribers, and today the firm has over 16 million there.

Yet, even though Argentina and Uruguay are relatively saturated (with penetration rates over 110%), America Movil still picked up nearly 500,000 new subscribers in those two countries last quarter. The most impressive growth, though, has taken place in the Caribbean, where the number of wireless customers has jumped +44% since this time last year.

Overall, the company has registered four million new subscribers over the past three months, on top of the 30 million it gained last year. With wireless penetration rates edging closer to 100%, there will likely be 100 million new accounts in the region over the next three years -- half of which could be snared by America Movil.

But keep in mind, new phone subscribers are only part of the equation -- the amount they're paying each month is also likely to trend higher.

Each day thousands of customers abandon their inexpensive prepaid plans and sign up for mobile broadband and other premium services, which generate significantly higher monthly average revenues per user. Considering wireless broadband penetration is less than that of wireless voice back in 2000, the stage could be set for a second growth wave as powerful as the first.

Already, wireless data revenues are growing at a 70% or better pace in some markets. Management is forecasting that growth on the voice side will be "overshadowed" by mobile internet in the years to come.

Valuation and Outlook: AMX was one of the market's top performers during the glory days of 2004 through 2007, surging more than +600% over the period. However, the shares were cut in half last year and remain well below their peak in the lower-$60s.

But as we've seen, the company hasn't stalled in this sluggish economy. In fact, first quarter sales climbed +15%, thanks to a 3G-enabled +47% bounce in internet-related revenues. Meanwhile, profits jumped +19% to $0.70 per share.

Given the density of wireless phone usage in Latin America, I think we'll see decelerating subscriber growth going forward. But again, existing customers are already churning out over $5 billion in annual free cash flows -- more than enough to finance expansion projects internally without piling on debt.

Considering the company just plowed $6.9 billion back into its network, it should have ample capacity to accommodate higher traffic and handle tomorrow's data-intensive applications. With lighter spending on the horizon (and a modest payout ratio below 20%), I expect to see stepped up share repurchases and/or dividend hikes over the next year or two.

In the meantime, the shares could dial up gains in excess of +50% as they return to a fair value of $61.

Action to Take --> In less than a decade America Movil has become one of the world's largest and most profitable telecoms.

Despite its size, the company still continues to grow at rates exceeding those of the overall industry (suggesting it is stealing customers from weaker players). And by spreading fixed costs over an expanding customer base, a larger percentage of revenues are filtering to the bottom line -- operating margins near 30% are miles above the industry norm.

Even with howling macroeconomic headwinds, more than 170 million smart phones (which offer email, web browsing and other advanced capabilities) were sold worldwide last year. And that total is expected to rise to 192 million in 2009.

This looks to be a powerful growth driver as more users upgrade and begin taking full advantage of these devices.

Good Investing,

-- Nathan Slaughter
Editor
Half-Priced Stocks

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