NII Holdings (NIHD) faces competitive pressure which has placed the company on dangerous footing. Should the company meet the challenge, however, shares are worth many multiples of the current price. NII Holdings stumbled badly in transitioning to 3G services and has taken significant steps to turn around operations. If the effort fails the company will wither away within a few short years. If success occurs, fortunes will be made on the stock.
In the depths of the tech and telecom bust of 2002, Nextel Communications, now a part of Sprint (S), allowed its international division to go through bankruptcy. NII Holdings emerged from the rubble as a small stand alone Latin America wireless provider based in Reston, Virginia. The first lot of shares traded over-the-counter in November 2002 at $1.25 each at a bargain valuation. Unencumbered by heavy debt and following the successful Nextel road map for profitable growth, NII Holding's business hummed. The share price performed magically, peaking less than five years later with a gross overvaluation at $90 a share.
Providing cell phone service, however, is a capital intensive business which favors the large firms. NII Holdings' first quarter revenue was 1/23rd American Movil (AMX), its largest competitor.
NII Holdings has been stumbling in deploying its 3G network. The roll-out is regularly delayed and the company has struggled to optimize the network. In short, competitors are significantly further along in offering services requiring 3G technology.
The result of the stumble is customer additions have slowed to a crawl, revenue is declining significantly and cash flow has been cut in half.
Many initiatives are in place in the attempt to turn around the company. Management expects the second quarter of 2013 to be the trough in cash flow from operations. Deployment of 3G in Mexico is planned to reach critical mass, followed by Brazil next year. In the short term, investors ought to carefully examine the progress made in Mexico in the coming quarterly reports.
Financially, management bought the company a modest amount of time with additional liquidity. To date in 2013, over $900 million has been raised in the high-yield debt market as well as $400 million from the sale of its Nextel Peru division. Management continues to consider tower sales.
Importantly, Steven Shindler, who was the company's CEO from 2000-2008, has been reappointed CEO.
NII Holdings ended the first quarter with $1.9 billion in cash and with the recent financial transactions should end the second quarter with over $2.0 billion on the balance sheet. However, the clock is ticking. With the 3G deployment stumble, capital spending and interest expense now exceeds the shrinking cash flow. Debt outstanding was $5.7 billion at the first quarter end.
Returning the company to profitable growth is dependent upon the 3G rollout being successful over the next year.
NII Holdings' market capitalization is $1.15 billion. Over the coming years the equity will show itself to be worth either zero or many billions. The result shall be a binary event.
To put the deeply discounted valuation in perspective, compare the market cap to past cash flow as measured by operating income before depreciation and amortization (OIBDA):
- First quarter 2013: $230 million
- Full year 2012: $936 million
- Full year 2011: $1.56 billion
- Full year 2010: $1.43 billion
- Full year 2009: $1.11 billion
- Full year 2008: $1.17 billion
- Full year 2007: $924 million
- Full year 2006: $662 million
- Full year 2005: $484 million
- Full year 2004: $348 million
- Full year 2003: $248 million
- Full year 2002: $169 million
- Full year 2001: -$88 million
As is obvious, should NII Holding regain a place as wireless communications leader, the growth prospects would be remarkable. Latin America wireless markets are immature with 3G penetration rates under 40%. NII Holdings continues to offer the popular Push-To-Talk product. The company has performed exceptionally well in the past.
To handicap the chances of success is only educated guesswork. Perhaps as much as a 50% chance of revitalization is possible. At the same time, the NII Holding shareowner is looking for much more than only a mere double in the share price. Either way, we will continue to follow the company closely. The second quarter results release and conference call will be prior to the market opening on Thursday, August 1, 2013. Both investors and speculators are encouraged to do significant due diligence.
Additional disclosure: I have owned NIHD shares in the past and may own shares again in the future.