By Stephen D. Simpson, CFA
Although the suppliers of consumer essentials like wireless phone service are supposed to be the safer, less-volatile way to play emerging markets, that wasn't the case in 2011. To name just one example, Latin American giant America Movil (NYSE: AMX) basically fared just as bad as the broader Mexican and LatAm stock markets. While the America Movil story is no longer about pioneering the expansion of wireless service south of the U.S. border, the fact remains that value remains in one of the best-run emerging market corporations.
Trying To Surf Changing Tides In Mexico
America Movil started off as a spin-off of Mexico's fixed-line operator Telmex and Mexico is still a crucial market for the company. More than one-third of the company's revenue comes from here and more than half of corporate EBITDA, due in large part to its approximately 70% share of the wireless market.
A lot is changing, though. The Mexican government has gotten more aggressive about trying to stimulate competition in the market and America Movil has been forced to accept cuts in lucrative mobile termination rates (despite a lengthy and rancorous court battle). The company is also seeing a resurgent Iusacell (helped by Grupo Televsia (NYSE: TV)), as well as always-competitive Telefonica (NYSE: TEF).
Still, the company continues to explore new growth opportunities. The company has continued to post double-digit sub group as more customers sign up for a wider range of services. Buying former parent Telmex was arguably better for Carlos Slim (who controls America Movil) than shareholders, but there is still good cash flow potential from the deal. There are also meaningful opportunities from growth in data, broadband, and pay TV but the company will be “splitting” these with competitors like Axtel and Megacable.
A Familiar Story Elsewhere
Although America Movil is not the dominant incumbent outside of Mexico, it nevertheless faces similar deeply-penetrated, highly competitive markets in other Latin American countries. Brazil provides about one-quarter of the company's revenue, but here too rivals like Telefonica's Telefonica Brasil (NYSE: VIV), Brasil Telecom (NYSE: BTM), NII Holdings (Nasdaq: NIHD), and Telecom Italia's TIM Participacoes (NYSE: TSU) offer constant competition on prices and service.
Does America Movil have some competitive advantages? Yes. America Movil has historically had fewer challenges in funding its infrastructure needs and has usually been out in front when it comes to new services and technologies. Still, it's a price-driven market and customers are not going to pay more for America Movil's services just because they were first.
Don't Expect Much From The U.S.
I would not expect America Movil to look at the U.S. as its next major target market. For starters, AT&T (NYSE: T) owns a quarter of the voting shares and the company's relationship with Verizon (NYSE: VZ) has allowed it to build Tracfone into the largest prepaid wireless provider in the US (though it contributes less than 10% of the company's EBTIDA). Although further investment in Tracfone arguably makes sense, it would be hard to see how the acquisition of a company like T-Mobile would be a better use of capital than share buybacks or dividends given the capex needs and stiff competition in the U.S. market.
The Bottom Line
America Movil does not need to grow all that rapidly to produce value from here on. What the company needs to do is maintain its business (and the goodwill of regulators) and look to drive further operating profits and leverage from its capital base. Right now, though, the market seems to be pricing in an expectation that America Movil has topped out its margins and will face ongoing competitive erosion.
That seems like a fairly pessimistic outlook given the experience of established incumbents like Verizon and Vodafone (NYSE: VOD) in other markets. Moreover, it gives the company little credit for leveraging rising incomes to sell more advanced services like data and broadband. America Movil looks about 20% undervalued today; not a bad investment option for investors looking for a good balance of growth and future returns of shareholder capital.