For short-term investors, America Movil's (NYSE:AMX) fourth quarter report was a wreck. For long-term investors, though, I don't think it changes much of anything. Weaker margins are never a good thing, but America Movil is following a long-term gameplan for wireless voice and data growth, and its rivals are going to hard-pressed to compete so fiercely on price indefinitely. America Movil is by no means the growth stock it once was, but today's steep earnings-induced decline and long-term plan make it a more interesting name for GARP investors.
Some Good News In Q4, But Weak EBITDA Margins Dominate
America Movil's fourth quarter wasn't the disaster that the stock's reaction would suggest, but it certainly wasn't the strongest quarter in this company's history.
Service revenue fell 2% this quarter, despite flat overall ARPU and 9% growth in minutes of use (MOU), atop an 8% increase in subs. Revenue in the key markets Mexico and Brazil were up almost 6% and 3%, respectively, as the company benefited from strong wireless data growth in Mexico and absorbed a double-digit decline in mobile termination rates in Brazil. On a more positive note, America Movil continues to do well relative to DirecTV (NYSE:DTV) in the Brazilian pay TV market.
Where America Movil really suffered was at the EBTIDA line. EBITDA declined 8% this quarter, missing the average analyst estimate by 9% to 14% depending on the data source you use. EBITDA margin declined by more than two points, with both Mexico and Brazil seeing declines of more than two and a half points.
Buying Tomorrow's Growth, Today?
While I'm not happy to see the margin pressure this quarter, I believe it may not be so bad from a long-term perspective. A large part of the miss was driven by handset subsidies, and the company is launching (or prepping to launch) LTE service in its main markets. I believe this roll-out will ultimately facilitate stronger wireless data growth for America Movil, and subsidizing handsets is a cost that the company is choosing to incur today in the effort to drive that data growth in the future.
Given the strong margins for wireless data at American carriers AT&T (NYSE:T) and Verizon Wireless (co-owned by Verizon (NYSE:VZ)), I think this is a solid move for the long-term. Moreover, while pricing in Brazil hasn't been great recently, I don't think that Telefonica Brasil (NYSE:VIV) and TIM Brasil (NYSE:TSU) can keep this up indefinitely and still afford the network upgrades that the mobile market demands. Likewise, I'm not sure that out-subsidizing America Movil is going to work. Consequently, while I do agree that this level of margin performance was disappointing, I don't think it hurts the long-term outlook for America Movil and may in fact improve it.
Still Not Certain About The European Strategy
A lot of investors are irritated by America Movil's ventures in Europe (with takes in both KPN and Telekom Austria), and a rights offering by KPN is going to bring that issue back to the forefront of investors' minds. KPN announced a EUR 4 billion rights offering earlier this month, and it's going to cost over $1 billion for America Movil to maintain its stake (close to 2% of market cap). Given that KPN's share price has declined more than 50% since America Movil took its stake, a lot of investors will see this as throwing good money after bad (and would prefer to see it as a dividend or buyback instead), but the company continues to believe that this is an undervalued asset and an important part of the company's long-term diversification strategy.
The Bottom Line
I'm not all that ambitious about America Movil's revenue growth prospects, as I believe competition will likely limit growth to the low-to-mid single digits. That said, I do believe that the company will benefit from the margin benefits of greater wireless data contributions, and I believe the company can also improve the pay TV margins over time. Assume that America Movil's rivals don't engage in mutually destructive price competition, I believe the company can lift its free cash flow margin into the mid-to-high teens and drive free cash flow growth in the high single digits.
All of that works out to a fair value in the range of $26 to $29 today. With Wednesday's post-earnings decline, that suggests appreciation potential in a range of 15% to 30%, which I believe makes this stock worth consideration today. America Movil is no longer a hot growth play in Latin America, but I do believe that the company is following a plan that will ultimately result in solid cash flows and better capital returns (buybacks and dividends) down the line, making it a worthwhile idea for GARP investors today.
Disclosure: I am long AMX. 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.