AMX - America Movil: Strong LTV Trends Encouraging

2023-10-19 02:20:17 ET

Summary

• America Movil has continued to see encouraging growth in LTV - or lifetime value trends.
• The company's reduction in long-term debt has also been encouraging.
• I take a bullish view on America Movil.

Investment Thesis: I take the view that America Movil could see a rebound in upside, on the basis of growing LTV and a reduction in long-term debt.

In a previous article back in October 2022, I made the argument that America Movil ( AMX ) had seen impressive growth in revenues and earnings, but the current inflationary environment could potentially see a plateau in 5G demand going forward.

Since then, the stock has descended to a price of $17.14 at the time of writing:

The purpose of this article is to assess whether America Movil has the ability to see continued growth from here taking recent performance into consideration.

Performance

When looking at Q3 2023 earnings results , we can see that as compared to the same quarter last year - total revenue is down by -2.1% which is largely down to a reduction of -3.6% in service revenue.

With that being said, it should be noted that the reduction in revenue is due in significant part to the appreciation of the Mexican peso. America Movil states that given constant exchange rates, service revenue was actually up by 3.8%.

Additionally, we see that EBIT (earnings before interest and taxes) is down by -0.2% on that of last year. Once again, this was influenced by the appreciation of the Mexican peso as compared to all other currencies in America Movil's region of operations.

As we can see, Mexico and Brazil are the largest markets for America Movil by wireless subscribers.

However, Mexico remains by far the largest market for the company by revenue - with Q3 2023 revenue coming in at 81.904 billion Mexican pesos as compared to 11.489 billion Brazilian reals for the same quarter (which is equivalent to approximately 41.494 billion Mexican pesos) at a rate of 1 MXN = 0.276883 BRL at the time of writing.

From this standpoint, I would like to further assess the health of customer demand across the Mexican market by gauging lifetime value per quarter - i.e. the average value that America Movil realises from each customer across the lifetime of the company's dealings with that customer.

To calculate this, ARPU and churn rates for Mexico (across all wireless subscribers - postpaid and prepaid) were sourced and LTV was calculated by quarter as follows:

LTV = (ARPU / churn %) * 100

When looking at the below heatmap, we can see that LTV has continued to increase over the years. We can see that for 2023, LTV across each quarter saw a substantial increase on that of the same quarter last year.

Moreover, both ARPU and churn rates have been moving in the right direction over the longer term, i.e. ARPU has been rising and the churn rate (or the rate at which customers stop using services by America Movil) has been falling. In Q1 2018, ARPU stood at 137 Mexican pesos with a churn rate of 4.2%. In Q3 2023, ARPU stands at 173 Mexican pesos with a churn rate of 3.1%.

From a balance sheet standpoint, we can see that America Movil's long-term debt to total assets ratio has seen a slight decrease from that of last year, with long-term debt down by 6.92% over this period.

Source: Figures (in millions of Mexican pesos) sourced from America Movil Q3 2022 and Q3 2023 Financial and Operating Reports. Long-term debt to total assets ratio calculated by author.

From this standpoint, the fact that America Movil has continued to see rising LTV without having to increase its long-term debt levels is quite encouraging.

The company's quick ratio (total current assets less inventories all over total current liabilities) has remained unchanged at 0.63 over the period.

Source: Figures (in Mexican pesos) sourced from America Movil Q3 2022 and Q3 2023 Financial and Operating Reports. Quick ratio calculated by author.

While a quick ratio less than 1 indicates that a company does not possess sufficient liquid assets to meet its current liabilities, I take the view that given America Movil's long-term debt reduction - investors will be willing to tolerate a lower quick ratio while long-term debt continues to see a reduction and LTV trends continue to the upside.

My Perspective

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, I take the view that America Movil's decline over the past year may be market-related and a sign of investors being cautious of exposure to emerging markets rather than a sign of underperformance by America Movil per se.

Particularly, when looking at the P/E ratio over the last five-year period, we can see that America Movil is trading at a similar P/E ratio to that seen in 2019, yet earnings per share have trailed significantly higher since then:

In this regard, I take the view that America Movil is potentially undervalued at this point and has the capacity to rebound to a prior level of $22 that we saw earlier this year.

Risks and Looking Forward

In terms of the potential risks to America Movil at this time, I take the view that macroeconomic factors may stand to influence the company's trajectory going forward.

While I take the view that the price drop that we have seen in the stock over the past year is unjustified, the stock may stay at such levels or even see further downside if equity market sentiment deteriorates more generally and appeals for emerging market stocks also declines.

In addition, we have seen that the appreciation of the Mexican peso has led to a sales decrease in nominal terms - as revenues across the company's other operating regions came in lower.

While the trajectory of the currency and the corresponding effect on revenue growth has yet to be seen - we are seeing signs of the peso depreciating against the U.S. dollar once again:

Notwithstanding the above risks, I take the view that America Movil is in a good position to see growth over the longer term.

Conclusion

To conclude, America Movil has seen encouraging growth in LTV, and the fact that the company has concurrently been decreasing its long-term debt levels is also encouraging. For these reasons, I take a bullish view on America Movil.

For further details see: