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America Movil Remains Neutral

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On Jan 15, we reaffirmed our Neutral recommendation on America Movil (AMX - Free Report) . While the company’s top line surpassed the Zacks Consensus Estimate and the year-ago quarter, the bottom line missed our expectation and deteriorated considerably year over year.

Currently, the Zacks Consensus Estimate for fourth quarter earnings per share is pegged at 48 cents, with an annualized growth rate of 58.33%.

Why Retained?

Increased penetration of 3G data services in Mexico continues to catapult data revenue growth. Apple Inc. (AAPL - Free Report) iPhone has enabled America Movil to counter competition from the likes of Telefónica, S.A (TEF - Free Report) and NII Holdings, Inc. in a more effective manner while boosting customer adoption of 3G services, thereby stimulating ARPU (average revenue per user) growth. The company launched fourth-generation (4G) mobile services in 11 cities across Mexico. Further, America Movil launched LTE services in Brazil and currently covers 18 cities. We expect the company to perform well in Brazil and Mexico as it continues to focus on winning more contract subscribers, which in turn will minimize churn.

Inflationary conditions have impacted economic factors in Mexico and Brazil, and could challenge the company’s valuation. Interest rate fluctuations are likely to influence investment and consumption patterns in these markets. This may also affect the demand for the company’s services and its financial performance, to some extent. Further, slow subscriber growth and an unfavorable regulatory environment could mar its market value.

Currently, the biggest challenge that surrounds America Movil is the New Bill proposed by Mexican President Enrique Pena Nieto that highlights several measures to reform the country’s telecom and television industry. The main objective of introducing this bill is to bring more uniformity and transparency into the sector and curb concentration of power among predominant players, dictating market behavior.  Besides setting up a new regulatory body, the bill stresses on the implementation of the asymmetric regulations that faced severe condemnation by America Movil.

The rule implies that predominant players like America Movil, controlling the majority of the market share, will have to pay higher mobile termination rates (MTRs) to smaller peers but receive lower fees from them for network interconnection. In May 2013, the bill received approval from Mexico's Congress and can affect the operations of America Movil.

As a result, we remain cautious over the near-term performance of the company. AMX currently carries a Zacks Rank #3 (Hold).

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