America Movil (NYSE:AMX) is a wireless telecommunication powerhouse that looks like a slumbering giant. The firm primarily operates in the emerging Americas markets but has operations that span from the US down to Chile. While the stock has been down much of the year we feel that could soon change.
The firm currently operates under the protection of an economic moat that generates strong free cash flow, holds high profit margins, and currently is funding growth internally. The positive catalyst that we have identified deals with its large exposure to the emerging Americas where growth opportunities are likely to remain strong and margins are expanding. AMX in our view is a BUY because it has been overlooked by the investment community relative to its strong free cash flow, sound margins, and positive growth catalysts already in place.
Profitability and Cash Flow
From the standpoint of profitability the firm knocks it out of the park. Looking through the income statement we see that operating margins are at 25.06% (TTM) and that the net margin is at 14.99%. The firm’s ability to hold strong margins like this looks great when we see that revenue growth over the last decade has averaged 35.46% and still averaged out at 24.77% over the last 3 year period.
The bottom line result has been EPS growth of 11.42% over the last 3-years. We preferred to look at some short-term trends in relation to revenue and EPS growth in order to better illustrate how the firm has still operated well in a more restrained economic environment.
Profitability Trends:
Year | 2008 | 2009 | 2010 |
3-Year Av. Rev. Growth | 23.69% | 19.20% | 24.77% |
3-Year Av. Op. Inc. Growth | 41.40% | 20.97% | 21.19% |
3-Year Average Net Inc. Growth | 23.36% | 21.76% | 15.69% |
3-Year Average EPS Growth | 25.99% | 24.77% | 11.42% |
Earlier when we referenced sturdy cash flow we weren’t referencing hundreds of millions of dollars, we were talking about a few billion. Over the last 12 trailing months alone AMX has generated $6.87B in free cash flow for its shareholders. With cash flow like this we see that the firm has the flexibility to easily implement stock buybacks, make strategic acquisitions, and increase the dividend should it want to.
Cash Flow Trends:
| Year | 2008 | 2009 | 2010 |
CFO Growth (YOY) | -13.42% | 74.71% | 31.92% |
Free CFO Growth (YOY) | -1.61% | 64.57% | 24.22% |
Free Cash Flow/Sales % | 17.51% | 25.23% | 12.81% |
Free Cash Flow/Net Income | 1.02 | 1.29 | 1.36 |
The take away here is that the firm has revenue growth, earnings growth, and free cash flow to keep expanding in whatever way it feels will add further shareholder value.
Growth Opportunities Emerging Americas Markets
AMX has an extremely strong presence (70% market share) in its domestic market of Mexico, which is great but limits future growth opportunities. This is why the firm is currently looking to improve its margins and market share relative to smaller countries that reside in the Americas.
The firm has done very well in Brazil but its success hasn’t been limited to this one country in South America. While most people only reference Brazil when talking about emerging market opportunities in this part of the world there is definitely more opportunity than this one country. Smaller countries such as Colombia, and Peru, for example have done unbelievably well in the last few years in terms of their economic growth since the geo-political situation has substantially improved.
Profit margins remain squeezed in the smaller countries because AMX currently lacks the scale. This presents an opportunity though for the firm to expand its margins, find new market share (growth), and deploy cash reserves to gain a dominant position in these markets. Moving forward we see these smaller Latin American countries as being additional growth drivers on top of current operations in Brazil and Mexico.
Conclusion
American Movil most likely won’t have explosive growth given the firm’s size. Still, that doesn’t mean this Latin American slumbering giant can’t provide great returns given its overall growth opportunities. As well, given AMX’s substantial free cash flow generation the firm could easily use an acquisition strategy to continue growing into new markets outside of Latin America. This wouldn’t be something too surprising to see down the road in our view.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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