We are downgrading our long-term recommendation on America Movil SAB de CV (AMX), Latin America’s largest wireless company, to Underperform from Neutral on a rising Mexican peso. Currently, the stock has a short-term Zacks #3 Rank (Hold).
America Movil’s profitability is being affected by currency translation. The Mexican peso is currently at its strongest since May 2010. We believe gains in stocks and bonds, record foreign exchange reserves and strong investment trends are driving the peso.
This rise will reduce profits of the company as much of its revenues are generated in Mexico and subsequently converted to U.S. dollars. Thus, we believe the rise in the peso relative to the U.S. dollar will hinder the company’s operations and hurt profitability.
Earnings in the second quarter missed the Zacks Consensus Estimate on account of higher costs and expenses. However, this was partly offset by solid subscriber growth, driven by healthy contributions from Brazil, Mexico, Argentina and the U.S.
America Movil contends with high churn in key markets such as Brazil and Mexico. The churn rate in Mexico increased slightly to 3% in the second quarter compared with 2.9% in the year-ago quarter. In Brazil, churn increased 0.4% year over year.
Despite strong cash and cash equivalents on its balance sheet, America Movil had total debt of approximately $17.7 billion at the end of the second quarter.
America Movil’s principal markets are Mexico and Brazil. Competition has intensified in the Mexican wireless market with the entry of the country’s largest media company Grupo Televisa SA (TV). Although the company’s biggest subsidiary, Telcel, still commands a major share of the Mexican wireless market, it is gradually losing market share to stiff competition from Telefonica Mobil (Movistar), which has completed the commercial launch of its 3.5G network in 8 Mexican cities, representing a major network advancement.
The company’s second-largest wireless market, Brazil, has also become increasingly competitive. The company’s Brazilian operation (Claro) is being challenged by Vivo Participacoes S.A. (VIV). Competition also increased with Telemar Norte Leste (Oi) launching its mobile services in Sao Paulo, Brazil’s largest and most lucrative market.
Consequently, we feel investment risks associated with domestic and emerging markets, regulatory issues and intensifying competition may limit the company’s financial performance in the upcoming quarters.