NII Holdings Is David To America Movil's Goliath

Includes: AMX, NIHD
by: Takeover Analyst

With almost just one half of its market value left from twelve months ago, NII Holdings (NASDAQ:NIHD) appears to many as an attractive value play. While I enjoy the exposure into the Mexican economy as a hedge against domestic stagnation, I am not optimistic overall about the firm's business model and prospects going forward. NII Holdings offers wireless communication under Nextel and specializes in PTT walkie-talkie services. As Sprint (NYSE:S) is way behind the competition and needs to communicate its 4G LTE vision (see here), it is only fitting that its emerging market sister also appears outdated. Despite this, much has been made about the company's discount and growth story. I find, however, that the market has appreciated the wireless communication provider's historical growth to such an extent that the upside from an investment is now relatively limited.

From a multiples perspective, the stock appears cheap and undervalued. It trades at a respective 12x and 10.7x past and forward earnings, but does not offer a dividend yield. America Movil (NYSE:AMX), on the other hand, trades at a higher 13.2x and 11.4x past and forward earnings, but offers a dividend yield of 1.29%. Although the case could be made that high betas will drive risk-adjusted returns, I do not see an attractive risk/reward and positive momentum, especially in the short-term.

At the third quarter earnings call, NII Holding's CEO, Steve Dussek, nevertheless noted the milestones and company growth story:

As you can see in the press release that we issued this morning, we delivered another quarter of strong subscriber growth while continuing to make progress on the deployment of our 3G networks. Our focus in providing quality service led to a strong subscriber growth as we added 433,000 new customers to our network during the quarter. We have grown our customer base by 19% over the past year, crossing the 10 million subscriber mark. We were especially pleased to see improved subscriber growth in Mexico, where our net adds more than doubled relative to the second quarter.

We generated $381 million in OIBDA for the quarter while continuing to invest in the development of our 3G networks. We achieved a key milestone with the launch of our Push-to-Talk service on our 3G network in Peru. This new capability positions us to continue to offer our customers the best Push-to-Talk experience in the industry while supporting a range of new features and functionality. These new features include handsets and mobile broadband with data speeds that are up to 50x faster than those that are available on our 2G service.

We launched our first handset with this new capability just a few weeks ago in our direct and indirect sales channels, and so far, we have seen good customer acceptance of the product.

At the same time, net additions of around 58K in October were much lower than the three preceding months: 82K in September, 72K in August, and 55K in July. Greater competition is meanwhile limiting pricing power and margins, although this less of an issue than what some have made out. For example, Vivo's PTT service debuted successfully, but then quickly underperformed. Despite what many industry insiders have forecast, NII Holdings is no longer experiencing any meaningful disruptions from Vivo. And the long-term trend in margins also looks positive for the communications provider as selling expenses normalize and the competition flounders. Finally, the smartphone market and coverage expansion will serve as catalysts for the telecommunications company over the next few years.

As Brazil transitions to 3G around the second half of 2012, NII Holdings will benefit, but likely not as much as its bigger competitor, America Movil, will. For context, America Movil was spun off from Telmex, a virtual monopoly led by billionaire Carlos Slim. Not without reason, many still associate America Movil as part of Telmex, but it is actually now a sister company. Given the amount of America Movil's market power, I am reserved about how much NII Holdings will benefit from a telecommunications recovery in Latin America.

Consensus estimates for NII's EPS are that it will decline by 18.6% to $1.62 in 2011 and then increase by 22.2% and 39.4% in the following two years. Assuming a multiple of 12x and a conservative 2012 EPS of $1.90, the rough intrinsic value of the stock is $22.80. This implies less than a 10% margin of safety for the stock and, in my view, does not meet the threshold that justifies calling it a value play. While analysts currently rate shares a "strong buy" and a "hold" for NII Holdings and America Movil, respectively, I rate them both more of a "hold." Telecommunications is making incredible changes and, at this point, I am not optimistic about how a firm will do under the wings of Sprint and against a much stronger competitor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.