America Movil Is on the Move

05/13/2008 12:00 am EST

Focus: STOCKS

Nikhil Hutheesing, editor of Forbes Wireless Stock Watch, says the wireless provider is rolling out an advanced new digital network and its stock should pop.

Mexico's América Móvil (NYSE: AMX) is the largest wireless service provider in Latin America.  It operates out of Mexico City, but only about 30% of its business is actually in Mexico. The company's largest stakeholder is billionaire Carlos Slim (with a 30% share).

The company, which was spun out of Mexico's Telmex in 2000, has been growing rapidly mostly by acquiring troubled Latin American operators that took on too much debt during the telecom bubble. América Móvil then consolidates operations, changes management as necessary, and makes operations more efficient and profitable.

Through its subsidiaries, América Móvil provides wireless (as well as fixed line) communications services. The idea is to create a global system for mobile communications (GSM) based network for all its subsidiaries.

With 3G networks in place, América Móvil will be able to boost revenue and profit by selling more data services. It's already offering 3G service in Mexico, [and] the company plans to spend another $4 billion to upgrade its wireless networks to 3G in five or so more countries this year. Once that happens, the carrier will sell a wide range of data—such as music and video services as well as Internet connectivity.

I believe that América Móvil's upfront investment in 3G technology is very similar to the investments made by US carriers such as AT&T and Verizon in the past. While the initial impact of the investment may hurt the bottom line today, it will be more than offset as data revenues rise. That should begin to happen by the end of this year.

In addition, investors should realize that this is a well-run company. América Móvil, which grew through acquisitions, turned itself into a highly formidable competitor against bigger incumbents such as Telefonica. Last year, the company reported revenues of 312 billion pesos (about $29.6 billion)—up 28.2% from 2006. América Móvil generated a net profit of 58.6 billion pesos (about $5.5 billion), exceeding the previous year's net profit by 31.9%.

Shares of AMX look very attractive, fundamentally. Shares trade at a price/earnings ratio of 18x and just 13x expected 2009 earnings, yet the company's profits are expected to grow 25% this year. América Móvil has also been buying back stock recently and announced this month, that with the [recent] fall in its shares, it would be buying back more stock.

I think it's reasonable to expect that the company's stock price will return to trading at historical levels. Over the past ten years, AMX has had an average PE of 25x, compared to 18x today. If you value the company at 25x my earnings estimate for this year of $3.83 per share, you get a target price of $95 per share. (It closed below $57 Monday—Editor.)

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