Chuck Carnevale's  Instablog

While I have enormous respect for Jim Cramer’s marketing and promotional skills, I often have strong disagreements with his buy and sell advice.  I felt his recommendation to sell NII Holdings (NIHD) on his Monday show was not only wrong, but based on faulty reasoning and statistical manipulation of the facts and numbers.  To be fair, I hold a generally longer term investing perspective than Cramer that will naturally put us at odds regarding stock buy or sell recommendations.  Additionally, I focus more on fundamental values where investors like Cramer tend to be more price action oriented.  Consequently, I believe both NII Holdings (NIHD) and American Movil, S.A.B. de C.V. (AMX) are strong long-term buys based on fundamentals.

The adage that statistics don’t lie, but statisticians are damn liars applies to my objections to selling NIHD.  I felt Cramer really played with the numbers in ways that distorted the facts.  He didn’t lie, but I felt he exaggerated certain facts and left out other important ones.  For example, to state that NIHD is losing customers was way overblown and wrong.  Cramer stated that NIHD’s churn rate increased 40% from 1.5% - 2.1%.  the actual numbers are 1.8% - 2.1% which is a 20% not 40% increase.  Put in a more positive light NIHD had a 97.9% customer retention rate.  Considering the state of the economies in their market that’s pretty good.

I also took exception to his direct comparison to AMX.  In truth, they both sell wireless in similar markets, but each has their own niche.  NIHD markets to the business market and offers more feature rich communication protocols.  Their recent contract with Research In Motion (RIMM) to offer BlackBerry phones is an example. Their established relationship with Motorola’s iDEN technology that provides among others, a push-to-talk functionality that appeals to business users is another differentiator for NIHD.  AMX offers more basic service to the general population or retail user.  There is ample room in the market for both companies.

The following fundamental research graphs show the attractive values and opportunity for both companies based on fundamentals.

FIGURE 1a NIHD Earnings-Price Correlation

FIGURE 1b AMX Earnings-Price Correlation

As you can see from Figure 1a, NIHD has achieved strong earnings growth of 29.1% since 2003 after being spun off from Nextel International.  Cramer talked about their stock being up 90% from its lows, failing to mention how undervalued it had became, or that it only traded at 9 times earnings compared to a more normal 20 plus PE.  Therefore, in my opinion it still has a long way to go - long term.  Also, the dip in earnings for 2008 and forecast for 2009 is attributed to FOREX.  Figure 1b shows that AMX also achieved strong earnings growth of 44.8% since 2003. It is also undervalued, trading at 11.7 times earnings versus a normal 18.4 PE. Note that it does have a higher PE ratio than NIHD. As Figures 2a&b below depict, operating cash flow for both companies is quite strong as well.

FIGURE 2a NIHD Operating Cash Flows 

FIGURE 2b AMX Operating Cash Flows

Figure 3a below shows that NIHD is currently trading at one of its lowest price to sales ratios ever of 0.74.  Sales have remained strong while price has fallen precipitously.  Figure 3b shows that AMX also sells at a historically low price to sales ratio of 2.52.  However it’s almost three times more than NIHD’s 0.74.

FIGURE 3a NIHD Price/Sales

FIGURE 3b AMX Price/Sales 

Finally, Figure 4a below shows that according to Zacks the current consensus growth rate for NIHD for the next five years is expected to be 14.5%.  Even though this is half their historical rate of growth it still implies a great opportunity at 9 times earnings.  If they achieve this forecast, as is very likely, a PEG ratio valuation of 14.5 times earnings implies over a 25% compounded rate of return by year-end 2014.  On the other hand Figure 4b shows that AMX, according to Zacks, is only forecast to grow at 9.6%/year for the next five years and trades at a higher 11.7 PE. Therefore, NIHD appears to be the stronger buy based on a higher consensus estimated growth rate and a lower PE ratio.

FIGURE 4a NIHD Forecasting

FIGURE 4b AMX Forecasting 

I believe the fundamentals argue strongly that NIHD is a compelling long-term buy.  There are other issues I had with Cramer’s take such as his opinion on 3G build out.  NIHD already has successful 3G build out experience in Peru.  NIHD has ample cash on their balance sheet and strong partners in Motorola (MOT) and Research In Motion (RIMM) interested in their success.  However, the bottom line is that to advise people to sell NIHD is in our opinion an injustice.  To invest in both NIHD and AMX makes a lot more sense.

Full Disclosure: Long NIHD