NII's Profits Rise In Down Economy

12/7/2009


  Recent Price
$31
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
16
  Shares (millions)
174
  Long-Term Debt as % of Capital
49%
  52-Week Price Range
$35.01 - $10.23

Unlike stodgy, slow-growing U.S. telecommunication companies, NII Holdings ($31; NIHD) offers explosive growth potential by tapping into the underpenetrated Latin American wireless market. But NII’s bright growth outlook (Wall Street expects 18% annualized growth in per-share earnings over the next five years) doesn’t translate to a premium price for the U.S.-based company.

Although the stock’s price has risen more than 50% over the past year, NII remains an appealing value. At 16 times trailing earnings, the shares trade 27% below the five-year average. The PEG ratio (P/E on estimated year-ahead profits divided by estimated five-year profit growth) is just 0.71, one of the lowest in the industry. Exhibiting an attractive blend of growth and value, NII is a Focus List Buy.

Business breakdown

Operating under the Nextel brand, NII offers wireless services to business customers in Mexico (44% of sales in the nine months ended September), Brazil (37%), Argentina (12%), and Peru (6%). Products include digital cellular voice services, data services, and wireless Internet access.

This broad service mix ties in with NII’s strategy of building out its 3G wireless network. Heavy investments appear to be paying off in Brazil, where sales rose 14% in the first nine months of 2009. NII may next expand its network in Mexico. After a delay of more than two years, Mexico plans to hold a spectrum auction in early 2010. A winning bid could give NII the capacity needed to offer 3G services, helping it better compete with the country’s leading carrier, America Movil SAB ($50; AMX).

NII might have enough liquidity to put together a bid without issuing stock. The company carries cash of $2.04 billion, or $12.26 per share, up more than 36% from year-ago levels. And the company has limited debt repayments due before 2011.

The base of digital subscribers climbed 20% to 7.04 million over the past year. NII added about 329,500 net subscribers in the September quarter, 16% off last year’s pace. Customer attrition, or churn, was 1.93% for the quarter — up from 1.87% a year ago but below the 2.15% seen in the June quarter. The average cost of adding a new subscriber shrank 16% in the quarter, while average monthly revenue per handset fell 22% to $46, partly from the effect of the U.S. dollar rising against currencies in Mexico, Brazil, and Argentina. Exchange rates are now fairly close to year-earlier rates. Barring additional fluctuations, the currency effect on revenue should be less pronounced this quarter.

Conclusion

One of our more volatile stocks, NII is vulnerable to currency fluctuations and the economic and political fragility of emerging markets in Latin America. However, an improving balance sheet provides flexibility and helps mitigate those risks. NII also delivers high-quality profits, with cash flow consistently exceeding net income.

Consensus estimates project per-share-earnings growth of 14% in 2009 and 7% in 2010. After growing sales at an annualized rate of 29% over the past five years, NII is on track for a more modest gain of less than 5% in 2009. But Wall Street expects 20% higher sales in 2010. An annual report for NII Holdings Inc. is available at 1875 Explorer St., Suite 1000, Reston, VA 20190; (703) 390-5100, www.nii.com.

NII HOLDINGS
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Sep '09 $0.69 vs. $0.50 - 3% $31.39 -

$17.98

18 - 10
Jun '09 0.79 vs. 0.88 - 4% 21.39 - 12.87 11 - 7
Mar '09 0.43 vs. 0.65 - 3% 24.49 - 10.23 12 - 5
Dec '08 0.05 vs.

0.71

+ 5% 38.43 - 12.38 14 - 5
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $4.27 $2.14 $0.00 $57.05
-
$12.38 27 - 6
2007 $3.30 $2.21 $0.00 90.43
-
42.50 41 - 19
2006 $2.37 $1.67 $0.00 69.94
-
42.80 42 - 26
2005 $1.75 $1.09 $0.00 48.23
-
23.59 44 - 22
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
91 51 91 92 72 35 82

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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