On Oct 4, 2013 we maintained our Neutral recommendation on Latin America’s largest wireless carrier America Movil S.A.B. de C.V. (AMX - Free Report) . Over the long term, we expect the company to benefit from the increased penetration of fourth-generation (4G) mobile services and expansion of its PayTV platform, which is one of its highest revenue contributors.
However, regulatory issues, a stiff competitive scenario, huge customer churn and high promotional spending could damage the company’s prospect. The company currently carries a Zacks Rank #3 (Hold).
America Movil continues to rule the Latin American wireless market with predominance in Mexico, Brazil and Columbia. The company remains committed to improve service offerings to its customers with aggressive investments in expansion of cellular networks in Latin America.
The company has also launched 4G mobile services in 11 cities across Mexico and recently acquired spectrum in Colombia. Going forward, the company intends to expand its LTE network and aggressively follow promotional activities to increase its penetration in the smartphone market. We expect the company to perform well in Brazil and Mexico where it focuses on winning contract subscribers, thereby minimizing churn.
The company has also diversified from its traditional wireless and wireline services and has ventured into pay-TV service, which remains one of the main growth drivers. The company even surpassed the market leader in PayTV services, DIRECTV and established its leadership across Latin America.
However, regulatory concerns in Mexico remain the biggest challenge for America Movil. The new telecom bill in Mexico implies that dominant players like America Movil will have to pay higher mobile termination rates (MTRs) to smaller peers while receive lesser from them for network interconnection. This will impact the company’s performance in Mexico.
High competition in Mexico and Brazil is also affecting America Movil’s market share in those countries. Strict switching policy in Peru and Ecuador is also not helping its cause as the company is facing massive customer churn in these markets.
Additionally, the expansion of Pay-TV and TracFone business remains detrimental to the company’s earnings growth as these are low margin businesses. So we prefer to remain on the sidelines.
Among other stocks Portugal Telecom SGPS S.A. and Telefonica (TEF - Free Report) with a Zacks Rank #2 (Buy) look attractive for the short term.