When it comes to the telecommunications sector, most investors are probably familiar with the U.S.l-based giants like AT&T (T) and Verizon (VZ). Indeed, these two companies dominate the U.S. telecom industry, and have a large investor following thanks to their high dividend yields.
However, investors would do well to consider international telecommunications stocks as well, which could provide diversification benefits. For example, Mexico-based telecom giant America Movil (AMX) is one of the best telecommunications stocks thanks to its broad market diversification, strong competitive advantages, and attractive valuation.
America Movil is based in Mexico City and has grown into the largest wireless telecommunications provider in Latin America, with a 30% larger customer base than its closest rival. It possesses significant market share across three major markets – Mexico, Brazil, and Colombia – alongside a presence in over twenty other markets, which improve the stability of its earnings and give it numerous opportunities for growth and attractive capital allocation. This is especially important in Latin America given that the region experiences regular political, regulatory, and economic instability.
30% of America Movil’s income stems from its Mexican business where the company has managed to sustain its market leadership – especially in wireless and internet with ~65% and ~50% market share, respectively – despite significant industry and regulatory disruption over the past half decade. AT&T (T) has taken advantage of the new regulatory climate to enter the market, leading to increased competition for America Movil and a significant bite into its profitability.
As the second largest wireless carrier and largest cable company in Brazil, America Movil is well positioned to capitalize on future growth in the country. Thus far, they have been plagued by a challenging economic and competitive environment, but the long-term outlook for the country remains promising. With their quality portfolio of assets and sizable market shares, we expect Brazil to be one of America Movil’s main growth drivers over the long term.
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Competitive Advantages Bring Growth
Another aspect of America Movil that we really like right now is its competitively advantaged business model. Most importantly, its large size and dominant market position in Mexico, Brazil, and Colombia give it considerable economies of scale and cost advantages in those markets. These primarily come from the fact that its wireless coverage and marketing businesses require significant fixed costs, resulting in considerable operating leverage. Therefore, it costs very little to add incremental users, making its enormous customer bases relative to competitors a significant competitive advantage.
That being said, there is a challenge to its dominant moat in Mexico thanks to the Mexican government’s moves in recent years to increase regulatory pressure in the industry. In fact, these regulatory moves led to AT&T entering the Mexican market in a meaningful way back in 2015 which has since eaten into America Movil’s profitability as AT&T has built out a scale that rivals America Movil’s while also doubling its market share. Regulatory reform also requires America Movil to grant competitors access to portions of its key infrastructure – such as towers and rights of way – potentially limiting its competitive advantage as a large-scale business.
Meanwhile, the company’s competitive advantage in Brazil remains strong thanks to heavy investment in the country over the past 20 years. Management has built a top-tier wireless and fixed-line network by acquiring the largest cable company in the country (Net Servicos) and then rapidly expanding its coverage to about two-fifths of the country. The strength of this business’ competitive advantage is evidenced by the fact that it has captured all of the internet access customer growth over the past four years at the expense of its two largest rivals, Oi and Telefonica. The company also possesses considerable economies of scale in the wireless business as the second largest carrier in Brazil. This is especially critical in this industry given the competitive pricing pressures involved.
Strong Balance Sheet & Attractive Valuation
In Colombia, America Movil is the dominant business in wireless with 56% market share, and its cable network reaches almost half of the population. Similar to Mexico and Brazil, its enormous scale enables it to benefit from considerable operating leverage and drive strong profitability.
Most of all, we like America Movil due to its attractive valuation. Currently trading at a price to earnings multiple of 13.2, it is offered at a slight discount to our fair value multiple estimate of 13.5. The stock also offers investors a 2.5% dividend yield that is well covered by cash flow and supported by an A- credit rating. With solid mid-single digit growth prospects and a very stable business model, the stock should provide attractive risk-adjusted returns to investors at current prices.
That being said, investors need to keep in mind some of the risks involved with investing here. The company’s concentration in Latin America means that it is constantly dealing with corruption and uncertainty across the economic, political, and currency spectrums. Given that it purchases much of its supplies in U.S. Dollars and receives its income in local currencies, America Movil is very susceptible to currency risks. If one or more of its major market currencies suffer a major devaluation, the company’s profits will be hit materially. Furthermore, continued weak economic performance in Brazil could continue to result in disappointing underperformance in its top-tier assets and businesses in the country. While we believe this is an unlikely scenario over the long term, nothing is certain.
Furthermore, political instability results in regulatory uncertainty across the region as any new governing regime could easily turn against the company, especially since it is run by one of the wealthiest and most powerful families in Mexico. This is particularly true given that its business -telecommunications – is widely considered to be mission critical infrastructure with national security implications. As a result, investors need to keep a pulse on the geopolitics and economics of the region in order to not be blindsided by a disruptive election result. It is also important to keep an eye on the future of U.S.-Mexico trade relations, as a trade war could lead to a steep devaluation of the Peso and stagnating economic growth in Mexico, which would likely hurt America Movil’s results materially.
In conclusion, we view America Movil as one of the most attractively priced telecommunications businesses available on the market today. However, investors should not view it as a “buy and forget” stock as it has numerous complex risks that will need careful monitoring to avoid the potential of suffering steep losses. But for investors willing to take the risk, America Movil stock could provide excess returns in the coming years.