Shares of NII Holdings (Nasdaq: NIHD ) hit a 52-week low on Thursday. Let's take a look at how it got there and see if cloudy skies are still in the forecast.
How it got here
For those of you who think success is guaranteed in the telecom market in rapidly growing Central and South American countries, you can feel free to check those hopes and dreams at the door.
Unlike traditional wireless provider in Central and South America that are focused on individual prepaid customers, NII Holdings' bread and butter is enterprise customers. NII provides services under the Nextel brand name and licenses out technology from Motorola Solutions (NYSE: MSI ) to provide its customers with Motorola's exclusive integrated digital enhanced network push-to-talk service. The advantage of this approach is that it creates higher average revenue per user (ARPU) rates than its peers, but puts the company at significantly more risk if the overall economy slows down since it's directly tied to enterprise customers.
In NII's first-quarter results reported in late April, we witnessed just how bad things are getting. Higher operating expenses related to its 3G rollout and tough competition in Brazil from the likes of Telefonica (NYSE: TEF ) , Telecom Italia (NYSE: TI ) , and America Movil (NYSE: AMX ) led to yet another quarterly EPS miss. In fact, NII has the dubious honor of missing Wall Street's earnings expectations in six straight quarters and nine of the past 10. Worse yet, ARPU, that all-important measure of how successful a wireless company is at extracting revenue from its customers, plummeted to $42 from $49 in the previous year (although most of this drop was currency related).
How it stacks up
Let's see how NII Holdings stacks up next to its peers.
NIHD data by YCharts
If you need more confirmation that your hopes and dreams should be checked at the door, check out this train wreck. Aside from America Movil, which is down "only" 20%, the remaining three companies are bound to have some very unhappy shareholders.
Price/ Cash Flow
Source: Morningstar, Yields are projected.
These financial metrics are about as all over the place as the performance chart above indicates.
As expected, with the best performance of the group, America Movil also boasts the priciest valuation. However, with large fiber-optic investments announced in Argentina, a country that boasts one of the highest mobile ownership rates in the world, it's tough to see America Movil not succeeding.
Telefonica, on the other hand, is the dividend diva of the group. Its troubles relate to its operations in Spain, a country at the heart of Europe's debt crisis, and worries have been raised by some Wall Street analysts that growth in its Latin American operations may slow to less than 3% in 2013 from 12% in fiscal 2012. Let's also keep in mind that Telefonica announced a dividend cut in December.
Telecom Italia offers an equally cheap valuation relative to NII while boasting a 5% yield. Note that NII is the only one of these four companies not to pay a dividend. Unlike NII, which keeps disappointing Wall Street, Telecom Italia is making baby steps in the right direction as was evidenced by its 5.3% year-over-year organic growth in the first quarter as it entrenches itself deeper in Brazil's mobile market.
Now for the $64,000 question: What's next for NII Holdings? That question really depends on whether it can grow ARPU, if it can really make inroads in Mexico and Brazil, where its market share is exceptionally low at present, and if it can live up to Wall Street's expectations.
Our very own CAPS community gives the company a three-star rating (out of five), with 91.4% of the members who rate it expecting it to outperform. I've yet to personally make a CAPScall on NII Holdings in either direction, and based on its dubious history of earnings misses, I'm not ready to commit to a selection as of yet.
NII's story makes sense: Enterprise customers offer higher ARPU rates, which mean better margins than its peers. However, NII's small market penetration and high 3G build-out costs aren't making much headway against the significantly larger wireless operators in Central and South America. Until NII begins meeting or beating Wall Street's expectations and also offers a dividend to shareholders, consider me uninterested.
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