Wireless Winners? Some Analysts Say Look South of the Border
U.S. and European wireless service providers have watched debt woes, an industry spending slowdown and profit shortfalls batter their stock prices in the last few months, and to an extent, their Latin American counterparts have been caught in the downdraft.
But some observers believe the stronger plays in the sector may lie south of the border. Analysts see growth opportunities, especially in Brazil and Mexico, where high demand, lower valuations and relatively low debt levels could put Latin American wireless service providers in a position to avoid the broader industry fallout. The number of cellular customers in Mexico, Latin America's second biggest cellular market, nearly doubled last year to 14.2 million, according to estimates by Lehman Brothers. And the firm expects total subscribers in Mexico to grow 40% to about 19.9 million by the end of this year.
According to Edward Bozaan, head of Waterford Partners, a hedge fund that searches for the best values in high-risk emerging markets, people in many Latin American countries have an easier time getting a prepaid cell phone plan than getting a land line installed. "It was revolutionary in Brazil," he says, estimating that 40,000 people stood in line during the first few days when providers started offering prepaid cell phones in Rio de Janeiro.
Bozaan tends to look for investing opportunities in countries that are out of favor. "Brazilian wireless is cheaper because two things are pushing them down," he says. "They've been hit by Argentina's crisis and the generally poor sentiment that people have about Brazil."Of course, investing in the emerging markets of Latin America comes with risks. Goldman Sachs cut its investment ratings on Argentina and Brazil earlier this month, citing domestic troubles. The ongoing debt crisis in Argentina and Brazil's drought and energy shortage, which threaten to hurt the nation's GDP growth and whittle down consumer demand, would certainly lead some investors to be cautious about putting their money in the region. Still, some market watchers believe that earnings growth, future acquisition potential and increasing financial transparency make Latin American wireless companies good bets for the long run. For instance, fund shop Janus recently made Mexico's America Movil (AMX) its only new position among the firm's top-100 holdings. Janus bought 61 million shares of the wireless service provider, making America Movil its 30th-largest holding. "It all depends on your time horizon," says Lehman's Paul Aran, who notes that he would allocate a 10-year investing time frame for Brazil, which is in "more of a start-up phase of growth," and a two-to-four-year time frame for Mexico, which has better short-term fundamentals. "But we're expecting consolidation over the next 12 months in Brazil, which would stimulate investor interest, " the analyst says. "A period of consolidation, regulatory change and economic growth will stir further demand." In a recent research report, Morgan Stanley Dean Witter's analyst Vera Rossi points out that unlike European operators, most Latin operators haven't paid high prices for mobile licenses and as a result have lower debt levels. She cites the "compelling" valuation levels of the Latin American wireless stocks she covers, which she says are roughly 50% off their annual highs and valued at 6.7 times 2001 EBITDA, or earnings before interest, taxes, depreciation and amortization. Rossi has an outperform rating on Telesp Celular (TCP), Tele Leste Celular (TBE), Tele Celular Sul (TSU), Tele Nordeste Celular (TND) and Iusacell (CEL), and a strong buy rating on America Movil.
|Company||Origin||Ticker||Price US$ 6/4/01||52-week High||52-week Low|
|Tele Celular Sul||Brazil||TSU||$20.06||$50.50||$15.90|
|Tele Nordeste Celular||Brazil||TBE||$43.50||$53.37||$27.25|
|Tele Norte Celular||Brazil||TCN||$27.54||$58.37||$24.00|
|Source: Standard & Poor's ComStock|
Analysts are generally bullish about Mexico's America Movil, a spinoff from Telefonos de Mexico (TMX). America Movil also holds a 44% stake in Telecom Americas, a joint venture with Bell Canada International (BCICF) and San Antonio's SBC Communications (SBC). Rossi has a $30 price target on America Movil, The company's shares, which have a 52-week high of $23.29 lately traded at $20.78 on the New York Stock Exchange , having regained about 49% from the 52-week low of $13.93. J.P.Morgan's Jose Linares, who says he's underweight in Argentina and Brazil, but overweight in Mexico, initiated coverage on America Movil in March. Linares, who has a long-term buy rating and a $25 price target on the stock, estimates that America Movil's consolidated EBITDA will grow at a rate of 31% over the next five years, ahead of the 25% average for the region. But the analyst's report contains a caveat: "Why not a Buy rating with such an upside potential? Because we believe that for the stock to reach our price target, the company will have to deliver on three fronts: earnings growth, acquisitions, and increased financial transparency. Although we expect America Movil to achieve progress on these three issues within the next 12 months, we do not expect material catalysts for the stock in the very near term." The American depositary receipts, or ADRs, of the Latin American wireless players remain thinly traded on the U.S. exchanges as many investors still find them unfamiliar, perhaps in part because of the exposure their U.S. and European counterparts receive. "ADRs are readily available, and research is also readily available, but the U.S. companies get more news," Aran points out. "One of the major obstacles [for Latin American wireless stocks] has to do with comfort with companies and countries. Their biggest barrier is one of newness to some people."
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