Inflation remains untamed and the Federal Reserve will keep pushing interest rates higher to rein it in. But values are definitely emerging for long-term minded investors, starting with selected non-U.S. companies like America Movil (AMX), writes Roger Conrad, editor of Conrad’s Utility Investor.
The S&P 500’s decent year-to-date return and the resilient labor market are raising hopes the U.S. will avoid a recession and deeper slide for stocks this year. I’m not entirely convinced. Q1 results we’ve seen so far show pressure on earnings, including some essential services companies.
That said, you can find value in foreign utilities like AMX. U.S. dollar strength hurt returns in non-U.S. utilities the past few years. But foreign currency weakness against the dollar has also pushed selected non-U.S. utility stocks to big discounts, despite high quality and strong business growth. That makes now a great time for investors to strike.
Mexico looks like a great place to start. Mexico’s Peso is up almost 9 percent against the U.S. dollar since the beginning of 2022. That’s even as the US Dollar Index (DXY) is up 8 percent. It has gained even more against the Euro and other developed world currencies.
The Peso’s strength has made AMX a sector outperformer over the past year. But its rise against currencies of the other 24 countries where the company operates has been an ongoing challenge to management’s rapid broadband and wireless customer acquisitions, with Brazil (15 percent revenue) and Colombia (10 percent) the most important countries outside of Mexico (40 percent).
That said, top line numbers also conceal very encouraging underlying trends, including 22.5 percent wireless service growth in Brazil following the acquisition of a portion of Oi SA’s network. Wireless sales overall excluding currency impacts rose by 9 percent in Q3. Broadband sales increased by 3.4 percent, and nearly 5 percent in Brazil and Mexico. Revenue from corporate networks rose 12.6 percent, with Brazil up 27.7 percent, Colombia 14.4 percent, and Mexico 8.1 percent.
Pay television sales declined 5.4 percent and legacy wireline voice dropped by 6.1 percent. But America Movil’s new services are now clearly driving overall revenue. And that’s boosting margins, with EBITDA (up 5 percent at constant exchange rates) increased to 38.8 percent of revenue, from 38.6 percent in 2021.
Expanding in the highly competitive communications sector depends on balance sheet strength. America Movil expects $4.5 billion plus in free cash flow after dividends in 2023, enough to pay off its $1.14 billion of 2023 debt maturities and $2.8 billion variable rate debt with room for stock buybacks.
Recommended Action: Buy AMX up to $22.