Cramer Is Wrong: Why NII Holdings Is a Buy

While I have enormous respect for Jim Cramer’s marketing and promotional skills, I often have strong disagreements with his buy and sell advice. I felt his recommendation to sell NII Holdings (NIHD) on his Monday show was not only wrong, but based on faulty reasoning and statistical manipulation of the facts and numbers. To be fair, I hold a generally longer term investing perspective than Cramer that will naturally put us at odds regarding stock buy or sell recommendations. Additionally, I focus more on fundamental values where investors like Cramer tend to be more price action oriented. Consequently, I believe both NII Holdings and American Movil, S.A.B. de C.V. (AMX) are strong long-term buys based on fundamentals.

The adage that statistics don’t lie, but statisticians are damn liars applies to my objections to selling NIHD. I felt Cramer really played with the numbers in ways that distorted the facts. He didn’t lie, but I felt he exaggerated certain facts and left out other important ones. For example, to state that NIHD is losing customers was way overblown and wrong. Cramer stated that NIHD’s churn rate increased 40% from 1.5% - 2.1%. the actual numbers are 1.8% - 2.1% which is a 20% not 40% increase. Put in a more positive light NIHD had a 97.9% customer retention rate. Considering the state of the economies in their market that’s pretty good.

I also took exception to his direct comparison to AMX. In truth, they both sell wireless in similar markets, but each has their own niche. NIHD markets to the business market and offers more feature rich communication protocols. Its recent contract with Research In Motion (RIMM) to offer BlackBerry phones is an example. Its established relationship with Motorola’s (MOT) iDEN technology that provides among others, a push-to-talk functionality that appeals to business users is another differentiator for NIHD. AMX offers more basic service to the general population or retail user. There is ample room in the market for both companies.

The following fundamental research graphs show the attractive values and opportunity for both companies based on fundamentals.

FIGURE 1a NIHD Earnings-Price Correlation

FIGURE 1b AMX Earnings-Price Correlation

As you can see from Figure 1a, NIHD has achieved strong earnings growth of 29.1% since 2003 after being spun off from Nextel International. Cramer talked about their stock being up 90% from its lows, failing to mention how undervalued it had became, or that it only traded at 9 times earnings compared to a more normal 20 plus PE. Therefore, in my opinion it still has a long way to go - long term. Also, the dip in earnings for 2008 and forecast for 2009 is attributed to FOREX. Figure 1b shows that AMX also achieved strong earnings growth of 44.8% since 2003. It is also undervalued, trading at 11.7 times earnings versus a normal 18.4 PE. Note that it does have a higher PE ratio than NIHD. As Figures 2a&b below depict, operating cash flow for both companies is quite strong as well.

FIGURE 2a NIHD Operating Cash Flows

FIGURE 2b AMX Operating Cash Flows

Figure 3a below shows that NIHD is currently trading at one of its lowest price to sales ratios ever of 0.74. Sales have remained strong while price has fallen precipitously. Figure 3b shows that AMX also sells at a historically low price to sales ratio of 2.52. However it’s almost three times more than NIHD’s 0.74.

FIGURE 3a NIHD Price/Sales

FIGURE 3b AMX Price/Sales

Finally, Figure 4a below shows that according to Zacks the current consensus growth rate for NIHD for the next five years is expected to be 14.5%. Even though this is half its historical rate of growth it still implies a great opportunity at 9 times earnings. If they achieve this forecast, as is very likely, a PEG ratio valuation of 14.5 times earnings implies over a 25% compounded rate of return by year-end 2014. On the other hand Figure 4b shows that AMX, according to Zacks, is only forecast to grow at 9.6%/year for the next five years and trades at a higher 11.7 PE. Therefore, NIHD appears to be the stronger buy based on a higher consensus estimated growth rate and a lower PE ratio.

FIGURE 4a NIHD Forecasting

FIGURE 4b AMX Forecasting

I believe the fundamentals argue strongly that NIHD is a compelling long-term buy. There are other issues I had with Cramer’s take such as his opinion on 3G build out. NIHD already has successful 3G build out experience in Peru. NIHD has ample cash on its balance sheet and strong partners in Motorola and Research In Motion interested in its success. However, the bottom line is that to advise people to sell NIHD is in our opinion an injustice. To invest in both NIHD and AMX makes a lot more sense.

Full Disclosure: Long NIHD

Comments

[WACG:]

Cramer permits his friends to "front run" price movements in many stocks he pumps and pans on his show.The disclosure that he "might" preannounce stocks discussed on his show scrolls by so fast that it is very hard to read the fine print. Cramer is a self-promting clown.

Jun 26 08:40 AM

[HerrKevin:]

Seems like this could be a real cramer bashing thread here. Before you all get too happy about calling cramer all sorts of names and accusing him of things, remember that his advice to people isn't to buy and sell on his recommendations. His advice is to do your own research and learn when to buy and sell based on his recommendations.

If people are too stupid to take cramer's advice and simply sell a stock like NIHD just because he said so then they deserve whatever losses they incur. But most people who follow cramer understand that when he says to buy or sell a stock, there is something to be learned from the reason behind it, and that nobody has to agree with him 100% of the time (I'm a fan, but I still wouldn't purchase a number of his recommendations at any price)

But I know many of you like to insult cramer as much as possible on this site, so go ahead, call him a bunch of names, don't bother to take any of his advice seriously, I don't care how you invest.


On Jun 26 08:40 AM WACG wrote:

> Cramer permits his friends to "front run" price movements in many
> stocks he pumps and pans on his show.The disclosure that he "might"
> preannounce stocks discussed on his show scrolls by so fast that
> it is very hard to read the fine print. Cramer is a self-promting
> clown.

Jun 26 09:25 AM

[Chuck Carne...:]

I did not write this article inorder to bash Cramer. I wrote this article to support NIHD as a buy. As I disclosed,I run portfolios that are long NIHD. Obviously,I disagreed with Cramers view and therefore offered mine. I sincerely hope this does not become a bashing thread. I don't believe the best way to become the tallest building in town is by tearing others down.

Jun 26 10:37 AM

[Jake Kimble:]

I like your article here, although I still believe that AMX is the winner vs. NIHD due to the fact that their markets are traditionally low income as opposed to customers who would be more likely to have higher end phones. I see business sectors lagging in their markets as their currencies have problems holding up against the dollar.

Check out my website at bullishbankers.com for tech articles on wireless companies like Verizon, AT&T, Qualcomm and much more.

Jun 26 01:04 PM

[RiskAverseA...:]

Equity is DEAD money. I don't care what "fundamentals" suggest. How is it people find it so hard to understand that with a mountain of debt existing higher up on the accounting food chain, and with capacity for servicing it continuing to collapse (just keep your eye on that moribund real estate market), that equity in all forms is at incredible risk of being indiscriminately sold simply for the sake of raising capital that's needed higher up in the food chain?

What do you think was behind last year's equity sell-off? This risk remains intact.

Truth is -- and all the evidence supports this -- yesterday's status quo will not soon return. Wall Street's infinite credit machine called "structured finance" -- the principle lever behind rising equity prices since 1995 -- will not be restarted. Do you really think that with the very Federal Reserve's credibility coming under attack the capacity of private financial firms to infinitely create credit will soon be restored? Please. Send me whatever you're smoking if you do.

Nevertheless, debt liabilities underlying the dead game of structured finance remain. Equity is at great risk.

Jun 26 02:45 PM

[FloridaBoy2:]

On Jun 26 07:06 PM money hardball wrote:

cramer is a tool.....Agreed use for what it is, but wear safety glasses.

To the OP...thanks for the informative article.

Jun 27 10:08 AM

[Stephen Ros...:]

Both AMX and NIHD have suffered largely because of unfavorable forex. The combination of an extraordinarily strong dollar and flimsy peso killed both of these companies over the last 2 quarters. AMX's growth was hidden beneath the forex pounding. Recent weakness in the dollar should allow AMX and NIHD stock prices to appreciate because their fundamental businesses are good. Zack's consensus for growth in NIHD seems to be very optimistic. Yahoo consensus puts estimates of 5 year growth at a little over 11% which would put the two companies on a similar trajectory.

Jun 27 02:38 PM