Since I first expressed my reserved outlook on NII Holdings (NIHD) and America Movil (AMX) here, the stocks have significantly underperformed the S&P 500 by 823 bps and 1,985 bps, respectively. Due to intense competition in telecom, negative FX impact, and greater-than-expected costs, I continue to recommend holding out on the two. Based on my multiples analysis and DCF model, I find that America Movil nevertheless has better risk/reward.
From a multiples perspective, NII Holding is the cheaper of the two. It trades at 11.2x and 11.1x past and forward earnings. The company markets under the Nextel brand in Latin America. With Sprint (S) showing frightening signs of a large downside, this only reflects negatively on NII Holdings. Consequentially, a much safer brick is America Movil, which trades at a respective 13.7x and 11.4x past and forward earnings while offering a dividend yield of 1.2%. This company is also led by stellar management and has less volatility than NII Holdings.
At the third quarter earnings call, NII Holding's CEO, Steve Dussek, nevertheless, noted successful penetration in 3G build:
We also made significant progress in the deployment of our 3G networks in Brazil, Mexico and Chile. In both Brazil and Mexico, we are currently planning for mid-2012 commercial launches of our 3G service in key markets. In Chile, we are continuing to push forward toward our goal of a commercial launch of 3G services in early 2012. Finally, we made significant progress on our marketing plans with the refresh of our brand image and our retail sales and service locations.
As you may know, the Nextel brand in Latin America is recognized by customers as the premium wireless brand. Our new identity unifies our brand across our 5 market.
Perhaps one element of the business that investors have not appreciated enough is how more than 50% of logged minutes come from its push-to-talk, or PTT, network. In addition, management has exceed goals in laying out the 3G in Peru. A Brazilian regulator has released December indicators that suggest fourth quarter net subscriber adds of 192K - meaningfully ahead of consensus. With that said, competitive pressures are substantial in Brazil and margins are thus likely to trend downwards.
Consensus estimates for NII Holding's EPS forecast that it will decline by 23.6% to $1.52 in 2011 and then grow by 15.1% and 46.3% in the following two years. Of the 6 revisions to estimates, all have gone downwards for a net change of -7.2%. Assuming a multiple of 14x and a conservative 2012 EPS of $1.66, the rough intrinsic value of the stock is $23.24, implying 16.8% upside. This is not enough, in my view, to merit opening up a long position.
Analysts, however, are more reserved about America Movil and rate it a "hold". Even still, the company forecasts better business in 2012 and is focused on organic growth. While Billionaire Carlos Slim has expressed how undervalued European businesses are due to the crisis, management is not going to acquisition mode any time soon. As it upgrades its infrastructure, the company expects to double wireless penetration to 30% in Latin America.
Consensus estimates for America Movil's EPS forecast that it will grow by 21.6% to $2.03 in 2011, grow by 5.4% in 2012, and then decline by 2.8% in 2013. Assuming a multiple of 14x and a conservative 2012 EPS of $2.07, the rough intrinsic value of the stock is $28.98, implying 24.2% upside. Modeling a CAGR of 7.6% for EPS over the next three years and then discounting backwards at a WACC of 9% yield an even large fair value figure of $26.62.