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Will the Market Hang Up on NII Holdings?

By Rich Duprey - Dec 12, 2012 at 5:30PM

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Investors are warming up to this previously unloved company

When a stock's share price is lower than a North Dakota thermometer in February, investors tend to give it the cold shoulder. But as fortunes change and the market warms to a stock's prospects, its price can heat up in a hurry. Unfortunately, it's hard tell that a stock is melting investors' hearts until after it's made that upward leap.

Taking the market's temperature
But using Motley Fool CAPS' proprietary ratings, aggregated from the opinions of the 180,000-member investor community, can help us find previously low-rated companies that recently enjoyed a bump in investor confidence. We can see whether they're truly heating up -- or headed back to the deep freeze.

Wireless communications operator NII Holdings (NASDAQ: NIHD) faces intense competition from larger, better-financed rivals in Brazil, so its planned acquisition of privately held Unicel do Brazil Telecomunicacoes would be a sizable expansion of its capacity. Investors hope NII, which markets Sprint's (S) Nextel brand throughout Latin America, would use the opportunity to gain market share, as Brazilian regulators cut the fees mobile phone companies charge to accept incoming calls from rivals.

Yet if a newly published report proves true, that acquisition could be unraveling. A Brazilian magazine published an anonymously sourced article saying regulators had decided not to approve the move and could seriously blunt its efforts at gaining traction.

Obviously, that's why you don't automatically buy the stock on any one data point alone, but rather use the heightened interest as a starting point for further research. If some of the best investing minds are taking notice of a stock and upgrading their prospects, maybe we should too.

Caution: Contents may be hot
The Brazilian mobile phone market more than doubled over the past five years to 258 million connections , making it the sixth-largest market in the world. More than one-third of all mobile phone users in Latin American and the Caribbean reside in Brazil and the number of subscribers is growing 19% annually, according to research from BuddeComm , a global independent telecom research and consultancy shop.

The Brazilian market is a regular United Nations of wireless operators. Spain's Telefonica (TEF -0.85%) controls Vivo Participacoes (VIV), and with 30% of the market is the largest telecom in Brazil, followed by about a 25% share claimed by Telecom Italia's (NYSE: TI) TIM Participacoes (TSU) and Mexico's America Movil (AMX -1.01%). There's one homegrown operator, Oi (NYSE: OIBR), and it's the smallest of the bunch, but it has a 19% share. The rest of the market -- less than 2% -- is divided up between everyone else .

A small splash
So even if NII gets clearance for the Unicel purchase, it's not going to move the needle very far in terms of market share, perhaps only making it the larger fish in a very small pond. Of course, it will vastly improve its own business, which is really the point, and though it may not be able to make a front assault on the international titans that run the game, it would benefit its shareholders.

The problem is subscriber growth is showing signs of slowing just as NII is experiencing greater customer churn. It had to delay the rollout of its 3G network -- even as Telefonica and America Movil accelerate theirs -- and it spells trouble for the Nextel brand.

Despite CAPS members seemingly having a more positive outlook on the wireless telecom, I'll be maintaining my underperform rating on it that I issued in September after it lowered its earnings guidance for the coming quarter and year. The stock has fallen 16% since then compared to a 2% rise in the S&P 500, but let me know in the comments section below if you think if the acquisition goes through it will be able to turn things around.

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Stocks Mentioned

Sprint Corporation Stock Quote
Sprint Corporation
S
Telefónica, S.A. Stock Quote
Telefónica, S.A.
TEF
$5.07 (-0.85%) $0.04
América Móvil, S.A.B. de C.V. Stock Quote
América Móvil, S.A.B. de C.V.
AMX
$20.09 (-1.01%) $0.20
Telefônica Brasil S.A. Stock Quote
Telefônica Brasil S.A.
VIV
TIM Participações S.A. Stock Quote
TIM Participações S.A.
TSU

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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