America Movil Upgraded to Neutral - Analyst Blog

We are upgrading our long-term recommendation on America Movil S.A.B. de C.V (AMX), Latin America's largest wireless company, to Neutral from Underperform on its long-term prospects. Currently, the stock has a short-term Zacks #3 Rank (Hold).

The growing Brazilian economy and improving macro conditions in Mexico and Argentina have raised America Movil's confidence for the next four years. The company expects revenue and EBITDA to increase 6% to 8% and 7% to 9%, respectively, from 2010 to 2014.

Third quarter earnings per ADS missed the Zacks Consensus Estimate by 4 cents. However, earnings improved approximately 7% from the year-ago level. Total revenue also increased year over year and was ahead of the Zacks Consensus Estimate. Data revenue, the primary contributor to the company's results, jumped 27% year over year.

Subscriber growth was also healthy during the recently concluded quarter with 266.8 million customers, up 11.5% year over year. Wireless subscription leaped 37.6% with a 22.4% increase in post-paid net addition from the year-ago quarter.

We believe America Movil continues to register strong data growth fostered by higher market penetration of 3G data services and smartphones, increased usage of 3G wireless services in Latin America as well as the expected launch of 4G services. America Movil has also expanded its presence outside Mexico and Latin America, with business acquisitions in the Caribbean and Central American markets such as Puerto Rico, Jamaica and Nicaragua.

The company expects to spend approximately $8 billion over the next four years for the expansion of data network. This data network is expected to boost data revenue via the Alcatel-Lucent (ALU) mobile backhaul solution that will deploy next-generation mobile services in Latin America. America Movil expects the Latin American wireless market to add over 150 million subscribers in the next four years. The company will offer the latest mobile services by simplifying its operations and reducing operating expenditures.

Further, America Movil's balance sheet appears sound with debt reducing to MXN$184.2 billion as of September 30, 2010 from MXN$217.5 billion as of December 31, 2009. The company distributed MXN$22.3 billion in the form of share buybacks and dividends to shareholders and invested MXN$ 29.4 billion in the Telmex Internacional stock in the first nine months of 2010.

On the flip side, the company contends with a high churn (customer switch) rate in key markets such as Brazil and Mexico. America Movil's second-largest wireless market, Brazil, is becoming increasingly competitive. The company's Brazilian operation (Claro) is being challenged by Vivo Participacoes S.A. (VIV), the leading wireless operator in Brazil with approximately 30% share. Competition has also intensified in the Mexican wireless market with the entry of the country's largest media company Grupo Televisa SA (TV).

Although we are encouraged by America Movil's operating performance and future business prospects, we remain concerned about the competitive and regulatory issues across the company's major markets, which may affect subscriber retention initiatives. Hence, we hold our neutral stance on the stock.

 
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