VIV - America Movil Executing Well In Its Major Markets But Not Getting A Lot Of Credit

2023-10-18 17:54:33 ET

Summary

• America Movil's third-quarter results were mixed, with constant currency service revenue and adjusted EBITDA showing some growth, but also some margin pressure.
• America Movil continues to build on its network advantages in Mexico, expanding ARPU on the back of increased 5G network utilization while continuing to grow homes passed with broadband.
• Brazil is performing better, including record EBITDA margin, as mobile competitors are behaving more rationally and broadband continues to grow.
• Concerns about capex versus capital return may be weighing on the shares, but this looks like an undervalued defensive play.

If stocks do indeed climb a wall of worry, it would seem that America Movil ’s ( AMX ) is taller than most … and possibly also greased and topped with barbed wire. I can understand concerns about intense competition in many LatAm markets, as well as concerns about currency headwinds (60% of EBITDA comes from outside of Mexico) and the risk that capital returns to shareholders will be compromised by the need to reinvest in businesses where there is meaningful competition.

Still, the middling performance of the ADRs (up about 5% over the past year) seems overdone and I think the shares should regain some ground against comps like Telefonica Brasil ( VIV ) and TIM SA ( TIMB ). With double-digit returns on capital employed and what I expect will be high single-digit long-term FCF growth, I think America Movil shares are undervalued below the low $20’s.

A ”Good Enough” Quarter With A Few Bright Spots

On balance I don’t expect America Movil’s third quarter results to be thesis-changing for most investors – bulls will find positives to support their thesis and likewise with bears and negative points.

Revenue declined 5% as reported, with service revenue up 4% on a constant currency basis and slightly better than sell-side expectations. Adjusted EBITDA rose 5% in normalized constant currency terms, missing by about 1%, with margin down 30bp to 38.9% on higher costs (wages, utilities, equipment, et al). Operating earnings, however, did beat by about 2%.

America Movil’s large Mexican operations generated 6% adjusted revenue growth, including 4% service revenue growth. Mobile revenue rose almost 5% on 2% subscriber growth, while fixed service revenue rose more than 3% with 8% growth in broadband. EBITDA rose a little less than 4%, with margin down a point, and this was slightly weaker than expected.

In Brazil, revenue rose more than 6% in local currency (beating expectations), with mobile up almost 10% with strong ARPU growth. Fixed service revenue rose for the first time in six years, helped by 7% growth in the broadband business. EBITDA rose more than 9%, with margin up 110bp to 41.6% to a new record, and EBITDA did exceed expectations.

The Colombia business continues to see pretty intense competition, leading to very little revenue growth (but still better than expected). Mobile revenue declined slightly (and still beat), while fixed service revenue rose about 1%, helped by a big improvement (+22%) in corporate business. EBITDA was flat, with margin down 50bp to 42.3%.

Service revenue in the Telekom Austria business rose 4%, with EBITDA up 1% and margin down about 70bp to 39.9%.

These businesses account for upwards of 80% of total EBITDA and there weren’t many notable surprises in the rest of the operations, though 4% service revenue growth in Peru wasn’t bad (but high costs stripped away the benefit at the EBITDA line).

Building On Its Strengths In Mexico

America Movil’s Mexican operations look to me like a strong operation that is leveraging its competitive and financial advantages to get even stronger. The company has a commanding share lead over AT&T ( T ) in wireless service and Open Signal estimates the company enjoys a nearly 4x advantage in network speeds. Management has recently started expanding access to its 5G network, and this has helped boost ARPU.

On the broadband side, the company’s operations now pass about 76% of homes (with a target for 80%+ in 2024) and the company enjoys close to 40% share. Although broadband adds did slow this quarter (20K versus 140K in the last two quarters), the company is benefiting from rivals lacking the balance sheet liquidity to challenge the company more aggressively.

I don’t see much here to concern me, apart perhaps from a risk that regulators will try to encourage competition by limiting America Movil in various ways. Barring that, I don’t see why the company won’t continue to see increased 5G utilization, driving both improved revenue and margins. I also note the company has some leverage to nearshoring growth, largely through its corporate business.

Brazil Seeing Healthier Competition

Brazil has been a challenging market at times for America Movil (and the other players as well), but it seems like the companies have decided to stop beating up on each other quite as intently, allowing for a period of better margins and capital returns.

America Movil has also opted to go with a higher-margin/higher-return emphasis with its business plan – competing less aggressively for absolute sub counts and focusing more on growth in the more lucrative post-paid market and particularly on customers willing to opt for higher-value plans.

On the broadband side, net adds accelerated (from the mid-40K’s to 64K) and while this is a highly competitive market, I still see a lot of underpenetration. The question is whether or not the market will “allow” the company to continue building out its infrastructure to seize that opportunity; I’m confident management will do what they believe is in the long-term interests of the company and its largest shareholders, but that may conflict with what the market wants in the short term.

The Outlook

Markets like Colombia remain intensely competitive, and I don’t expect that to change any time soon. I likewise don’t expect competitive pressures in broadband to lighten up in Mexico or Brazil anytime soon, and I think this is where the Street will be paying above-average attention to the company’s capex plans. I think building the business is a good use of capital, but management needs to strike a balance. To that end, I would note that management has been fairly active with selling/spinning out tower assets (like Sitios Latinoamerica ), so I would argue they’re still being smart about overall capital management.

I expect mid-single-digit revenue growth over the next five years, helped by ongoing growth in broadband in Mexico and Brazil and ongoing “market repair” in Brazil’s mobile market. Longer term, I expect growth to slow toward the 3%-4% range.

Although I think the company is at or near the worst of the cost inflation cycle, I’m not looking for major improvement over the next few years as I think competitors will limit margin leverage. With that, I expect EBITDA margins to hang around in the 39% range for a few years, though I do think operating margin will improve more over that time (around 200bp-250bp).

At the free cash flow line, I expect a quick return to double-digit FCF margin, with improvement to around 13% over the next five years. While increased leverage toward higher-value 5G service and follow-on broadband services should help margins, I’m only looking for improvement toward the 14% level over the long term, but that’s still good enough to support high single-digit FCF growth.

Discounting those cash flows back, I think America Movil is undervalued below the low-$20’s and is priced for an attractive mid-teens annualized return. Using a 5.5x EBITDA multiple that is consistent with operators in comparable markets, I get a fair value around $20.

The Bottom Line

In my view America Movil is a quality defensive name worth a closer look. The dividend yield is pretty decent and I think investors can reasonably expect capital appreciation on top of that as the company continues to drive improved ARPUs in its Mexico and Brazil markets, as well as continued growth in broadband. There are many other aspects to consider that go beyond this article, but this looks like a quality play that has underperformed more than seems reasonable relative to the underlying fundamentals.

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