NII Holdings Just Lowered the Boom

When companies forecast lower sales or profits, their stocks usually take a hit. It's not always easy to tell whether it's having a fire sale or burning down. Maybe it is time to get out -- or maybe it's time to buy more!

Earlier this month NII Holdings (Nasdaq: NIHD) updated its guidance for 2012 and took expectations down a notch or two: total net subscriber additions would likely come in at 1 million instead of 1.4 million as previously forecast, and consolidated operating revenues are now pegged at $6.1 billion instead of its prior guidance of $7.1 billion.

Now don't go blindly selling into their bearish outlook -- you still need to do some research. Use the announcement as a jumping off point for additional research.

NII Holdings snapshot

Source: FinViz.com. TTM = trailing 12 months. N/A = not applicable; NII doesn't pay a dividend.

Painful contractions
Despite industrial output rising ahead of expectations in July, the economy of Brazil is cooling off just as it is everywhere else in the world. That could be because the increase was just 0.3% and was still 2.9% below last year's rise. Economists now predict the country will see just 1.6% growth in GDP in 2012, the fifth consecutive week they've cut their outlook, though they're still hoping for 4% expansion next year.

NII Holdings, which operates Sprint's (NYSE: S) Nextel brand throughout Latin America, has run into tighter competition and higher expenses as it rolls out its 3G network south of the border. NII serves Brazil, Mexico, Peru, and Argentina, and the second quarter saw it launch the full suite of 3G services in Peru. Chile was just added to the list in July.

Brazil, though, is its largest market, accounting for 38% of the handsets and devices in service last year, but 50% of its consolidated revenues. Mexico accounts for another 35% of devices and 34% of revenues, but revenue from Brazil fell 22% in the second quarter.

NII is under pressure -- as are market leaders Telefonica (NYSE: TEF) and America Movil (NYSE: AMX) -- to meet tough new government regulations that require capital equipment upgrades. Coming as they do while the economy worsens has made the situation more untenable. Even Telefonica, the largest wireless carrier in the country, is suffering from delinquencies by its customers. It was forced to raise provisions for bad customer debts by 21% this past quarter.

Growing for those who get it
According to a recent Reuters story, the mobile phone market in Brazil more than doubled over the past five years to 255 million connections, but the economy has dulled that growth. NII suffered a 60-basis-point increase in customer churn to 2.3% in the quarter as it delayed the rollout of 3G services. Telecom Italia (NYSE: TI), which owns more than a quarter of the market in Brazil, enjoyed a 12.6% increase in revenue over the first six months of 2012, but still suffered from higher termination rates even as the number of lines it added jumped 7.5%.

And beyond subscribership, wireless carriers have to contend with worsening foreign exchange rates, a factor that accounted for a good part of NII's reduced guidance. Last quarter it experienced a $53 million loss as a result of unfavorable currency exchange rates.

Diminished expectations
NII having delayed unveiling its 3G network in its two largest markets does nothing to increase investor confidence in the wireless service provider, particularly as Telefonica and America Movil aggressively roll out their own platforms. Analysts now anticipate NII will witness a 14% drop in revenue in the current quarter and a 7.5% decline for the year while earnings will slide to a $0.26 quarterly loss (down from $0.02 a year ago). It's expected that full-year losses will amount to $0.85 per share, from a $1.15 profit in 2011.

Earlier this year, averagejoeus commented that an investment in NII Holdings was risky because any growth it will achieve comes with a price tag attached to it that will lead it to having a "high risk profile if not a survival/on-going concern."

With its own outlook for the future changing for the worse, I'm rating the wireless carrier to underperform the broad indexes on CAPS -- even at this severely depressed price. Let me know if you agree in the comments below.

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