The wireless communication industry has reached a level of maturity in most developed countries, but has much room to grow in underdeveloped countries. Based out of Mexico City, Mexico, America Movil (NYSE:AMX) is the largest wireless company in Latin America and the fourth largest in the world. Since its founding in 2000, America Movil has experienced impressive growth rates while strengthening its position as Latin America's top wireless communication company.
In the third quarter of 2013, America Movil generated a net profit of 16.4 billion pesos ($1.25 billion), down from 30.45 billion pesos in the corresponding period of 2012. Last year, the company made investments in KPN and Telekom Austria that drove up debt and financial expenses, as a result its third quarter profit decreased. Revenue increased 0.7% to 194.2 billion pesos, driven by gains from selling more expensive mobile phones. The company added 3.1 million subscribers during the quarter.
Latin America is one of America Movil's fastest growing mobile markets. Telefonica (NYSE:TEF), the second largest telecommunication carrier in the region, is America Movil's main competitor. Both companies employed different strategies to achieve similar goals. Telefonica is larger than America Movil, and operates throughout Europe and even China in addition to Latin America. Smartphone sales have boosted Latin American mobile market revenues in 2012. Smartphone sales are expected to grow at an average of 18.4% in the coming year. The fastest growth in smartphones will be in the Asia-Pacific and Latin American regions, each expected to see increases of around 23% in the next four years.
Despite a mobile penetration rate of over 100%, the mobile service market has still room to expand in Latin America due to growing demand for machine-to-machine and broadband services. The market revenue is estimated to increase from $81.03 billion in 2012 to $110.3 billion in 2018. The number of active mobile connections will increase from 672 million connections in 2012 to 830 million by the end of 2017. America Movil is focusing on expanding 3G and 4G network coverage and increasing data revenues in order to offset losses in voice revenues due to mobile termination rate (MTR) cuts.
America Movil dominates Mexico's wireless market, controlling nearly 70% of the Mexican mobile phone market, and about 80% of the fixed-line business. The company is generating nearly 35% of its revenue from Mexico. Mexico's telecom sector is dominated by a few players, as a result less competition exists in the country. The low competition helped the firm's Mexican subsidiary remain one of the most profitable wireless operations in the world.
Mexico's new telecom reform could affect America Movil's business. The reform aims to stir up competition in the telecoms sector by allowing increased foreign ownership of media and phone companies and giving regulators the power to force players controlling more than 50% of the market to sell some assets. Forcing dominant companies to sell assets as well as opening up the market to greater foreign investment would mean lower future revenue for America Movil. New entrants could also lead to a harsh pricing environment. The new telecom regulators also plan to issue new regulation on pricing and interconnection rates. Reduced interconnection costs could have a material adverse effect on America Movil as this will reduce its profit margins and limit cash generation.
America Movil has a great management team. Although Carlos Slim has stepped down from day-to-day operations, he is still the firm's largest shareholder and honorary lifetime chairman. The company has a very disciplined acquisition strategy. America Movil has been very good at taking control of companies that took on too much debt during the telecom bubble. It then consolidated operations, changed management as necessary, and made operations more efficient and profitable.
America Movil is planning to enter the Indian telecom market. The entry will depend on two important aspects: the new merger and acquisition guidelines and the deal between Vodafone (NASDAQ:VOD) and AT&T (NYSE:T). AT&T is not interested in Africa and India, and looking at selling most of Vodafone's Africa and India assets to America Movil or China Mobile (NYSE:CHL). China Mobile's possible entry into India will depend on China's political equation with India. India's relations with China are not as strong as with the U.S., so America Movil has more chances to buy the stake from AT&T.
The Indian telecom sector will provide high growth opportunities to America Movil. There are still lots of people in India who do not own a phone, probably one third of the population. India is the 3rd largest smartphone market in the world after China and the U.S. India's telecommunications services market is expected to reach $30 billion in 2014. The country is expected to ship 37 million smartphones this year as compared to 19.6 million last year. The growth is expected to remain high for the next 3 years.
The investment case for America Movil is a tricky one. On the one hand, America Movil is fantastically a strong company in the right industry. On the other side, new telecom regulations in Mexico pose greater risk for the company. America Movil will be able to offset future softness in Mexico if it enters the India market. I therefore recommend that investors either hold or cautiously buy this stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.