Thursday, March 21, 2013

It's Time to Follow Carlos Slim into his Company

Carlos Slim, the world’s richest billionaire, has lost around $5.8 billion off his net worth since the middle of February, due to a significant drop in the market price of his company, America Movil (NYSE: AMX). Since Feb. 1, America Movil has decreased by nearly 34.5%, from $25.55 per share to only $19 per share. The significant decline in America Movil’s shares is due to a bill proposed by Mexican president Enrique Pena Nieto to break up the company’s monopoly in Mexico. Should investors consider a significant drop in America Movil an investment opportunity? Let’s find out.
Mexico and Brazil are big markets
America Movil is considered the biggest wireless communications services provider and a major fixed-line operator in 18 countries in Latin America. The company reported that it had the largest market share in Mexico, Colombia, and Ecuador and the third largest market share in Brazil. The majority of its revenue, $705.5 billion pesos (USD $57.32 billion), or 91% of its total 2012 revenue, were generated from service revenue. Equipment revenue was $69.5 billion pesos (USD $5.63 billion). The biggest market for America Movil is Mexico, with 70.4 million wireless subscribers and 22.67 million revenue generating units (RGUs) in 2012. Brazil is its second largest market with 65.2 million wireless subscribers and 28.6 million RGUs.
In the Mexican market, the majority of its revenue, $177.2 billion pesos (USD $14.36 billion) are generated from wireless subscribers. Interestingly, out of 70.4 billion wireless subscribers, nearly 61.8 million subscribers were prepaid customers. In the fourth quarter of 2012, its average revenue per user (ARPU) increased to $172 pesos (USD $13.94) with an overturn rate of 3.6%. In Brazil, America Movil also generated significant revenue, R$12.76 billion (USD $6.42 billion) from wireless services. Out of 65.2 million wireless subscribers, 52.2 million of them were prepaid customers. The ARPU in Brazilian market was R$16 (USD $8.05) with an overturn rate of 3.7%.
The cheapest telecom player
Like other telecommunication companies including Telefonica (NYSE: TEF) and Verizon Communications (NYSE: VZ), America Movil employs high leverage in its operations. As of December 2012, it had $312.2 billion pesos (USD $25.3 billion) in total stockholders’ equity, $45.5 billion pesos (USD $3.7 billion) in cash and nearly $418 billion pesos (USD $33.87 billion) in both long- and short-term debt. Thus, its debt-to-equity ratio is 1.3. Verizon had a bit higher debt-to-equity ratio of 1.4, while Telefonica seems to have the most leverage with a debt-to-equity ratio of 2.8.
At $19 per share, America Movil is worth around USD $72 billion on the market. The market values America Movil at around 4.9 times EV/EBITDA. Telefonica, at nearly $15 per share, has a total market cap of around USD $66.5 billion. Telefonica is valued a bit higher at 5.21 times EV/EBITDA. Verizon Communication is the biggest company among the three, with nearly USD $139 billion in total market cap. At around $49 per share, Verizon is the most expensive, at 6.2 times EV/EBITDA. Among the three, America Movil is the most profitable company with the highest operating margin at around 20%. Telefonica ranked second with a 16% operating margin while the operating margin of Verizon was only 12%.
Highest potential total yield
Among the three, Telefonica pays shareholders the highest dividend yield: 4.5%. The dividend yields of Verizon and America Movil are 4.2% and 1.6%, respectively. Interestingly, as shares kept sliding, the company intended to pay a dividend of 22 centavos (USD $.018 dollar cents) per share and increase its share buyback plan by $40 billion pesos (USD $3.24 billion). The share buyback creates another 4.5% yield for shareholders. Thus, the total yield for America Movil’s shareholders is 6.1%.
The Mexican telecoms regulation bill, if was passed, would definitely affect the long-term performance of America Movil. However, America Movil seems to be quite cheap now, with the lowest EV multiple among its telecommunication peers. In addition, the potential future total yield of 6.1% is quite juicy for investors. With its current market-leading positions in several Latin American markets, America Movil is a buy at its current price.