Investors in large Latin American mobile phone service provider America Movil (NYSE:AMX) have gotten a respite lately from the worries about serious changes to the regulatory environment in Mexico. A decent earnings report showed that there's still some room for performance, while a transaction in Europe highlighted the potential value of at least one of its strategic investments. All told, though, this is a company still facing some serious challenges in its business, and one where investors still aren't completely confident in management's long-term ambitions.
A Good Second Quarter … Sort Of
Late last week, America Movil announced a set of results for the second quarter that, while better than expected, weren't exactly what investors were hoping to see.
Revenue rose 2% as reported (up 1% sequentially), with currency-neutral revenue growth of about 8%. That revenue figure was about 2% better than analysts expected, with revenue in key markets Mexico and Brazil up 5% and 8%, respectively. The “but” here is that service revenue was actually down 1%, with the beat coming from higher-than-expected equipment sales.
SEE: Ultimate Guide To iShares Latin America 40 Index Fund

Profitability was also higher than expected, but not exactly strong. EBTIDA was about 4% higher than expected, but still down 2% from the year-ago period. Profits were helped in part by more restrained marketing spending. It's worth noting, though, that while consolidated EBTIDA declined, profits were higher in both Mexico and Brazil (2% and 3%, respectively) and rebounded nicely in Colombia (up 11%).
Still Growing The Business, But At A Slower Pace
Even with fierce competition from the likes of Telefonica (NYSE: TEF) and Millicom, America Movil continues to grow the business, but not in wireless. America Movil saw a net loss of nearly 900,000 wireless customers this quarter, though the wireless subscriber count is still above 262 million. Importantly, America Movil continues to add subs in key markets like Mexico, Brazil, and Colombia, and has been supplementing its wireless business by getting more customers to sign up for additional offerings like pay TV, leading to 9% growth in “revenue generating” units.
The Company's European Strategy Gets Even Murkier
One of the issues for this company has been its uncertain deployment of capital – uncertain as in whether or not management is maximizing shareholder value by investing large sums of capital into struggling European service providers like KPN (Nasdaq: KKPNY) and Telekom Austria. While a recent development at KPN has highlighted some of the underlying value, America Movil's response likewise highlights the uncertainty around management's intentions.
SEE: 5 Earnings Season Investing Tips

A unit of Telefonica surprised the market with a cash and equity bid for E-Plus, KPN's German mobile unit, that could be worth close to 8 billion euros (with 5 billion of that in cash). While that bid was quite a bit more than where the market was valuing the unit, KPN's financial results, with revenue down 7% in the Dutch telco business, are a reminder that this business is still seriously challenged.

What makes this all curious is that America Movil has now indicated that it intends to end the agreement that capped its ownership of 30% at KPN. The acquisition of the E-Plus unit allows AMX to do this legally, and speculation is now building that America Movil not only feels that the Telefonica bid for E-Plus is too low (and that's not a done deal), but wants to acquire a majority stake in this company. With Western Europe's telecom markets thoroughly penetrated and growing slowly, this would be a controversial move, particularly as America Movil has never shown any particular expertise in turning around businesses or generating impressive margins in highly competitive markets (like Brazil).
SEE: How To Pick The Best Telecom Stocks

The Bottom Line
I continue to believe that the changes in the Mexican regulatory environment will be less damaging to the company than many fear. Likewise, I believe the long-term margin/profit potential in Brazil is better than it looks today, as America Movil's rivals cannot generate the returns on capital they need to remain competitive long-term.
Even so, the shares are not remarkably cheap today. Low-to mid single-digit revenue growth should translate into better long-term free cash flow growth as the company leverages past investment, and that suggests the shares are about 10% undervalued. Given the risks with capital allocation and regulatory changes, readers will need to decide for themselves whether 10% reward is sufficient for those risks.
Disclosure – At the time of writing, the author owned shares of America Movil.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center