Strong Profits in Mexico's Biggest Telecom?
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In this series on monopolies a number of different industries and companies have been mentioned. I believe that America Movil S.A.B de C.V. (NYSE: AMX) is a monopolist which offers solid returns due to its position in its home market. The company is not invincible by any means. It faces competition from local and international competitors like Chile's Entel. The knowledge and advantage America Movil gains in its home soil allow give the stability, profits, and knowledge necessary it to expand beyond Mexico. Investing internationally is not for everyone and Carlos Slim's powerful position in the company is a negative aspect. The blurry line between America Movil, state regulators, and other companies in Carlos Slim's conglomerate group does create a potential conflict of interests as stated in the latest 20-F. Nevertheless, America Movil has developed strong market share within Mexico and continues to grow their interests throughout Latin America and beyond.
The chart below shows the return on invested capital for America Movil has consistently exceeded that of Sprint Nextel (NYSE: S), Verizon Communications (NYSE: VZ), and AT&T (NYSE: T). For the year 2011 America Movil has a market share of 68.2% in the Mexican wireless market. Though the market share in 2011 is slightly down from the 2009 market share of 71.2% the company has still proven apt at keeping a high market share which is multiples above the figures posted by US carriers. Mexico's wireless market comes in at 49.1% of 2011 operating income while the Mexican fixed lines creates 17.2% and Columbia comes in at 12.6%. In Columbia's wireless market America Movil posted similar market share figures in 2011 at 65.5%.
In some wireless markets the churn rate has slightly increased while market share has decreased by a few percentage points. America Movil is not impervious to competition and they will need continual capital investment in order to keep up with the smart phone demand through Central and South America. Emerging market consumers do not have the same amount of disposable income as western consumers and it is more cost effective for them to purchase a smart phone with WiFi and basic computing functions instead of spending purchasing a laptop and a phone. I believe that as smart phones continues to decrease in price there will be a greater number of emerging market consumers which elect to upgrade to smart phones and PCs and in turn force the carriers to upgrade their networks. This can create issues for carriers like America Movil as Brazilian regulators recently banned sales of some mobile phone subscriptions due to an increased number of complaints about network failures.
The chart below shows just how poorly Sprint has performed relative to other major telecommunications companies. Their earnings yield and return on invested capital is far below the rates other companies. With the Nextel fiasco and WiMax the company has lost a large number of subscribers. AT&T and Verizon have benefited from Sprint's troubles. Smart phone users have a definite with signing up for AT&T's and Verizon's more advanced 4G LTE networks. As this info graphic from April, 2012 shows, Verizon has around 33% market share and AT&T has 31% in the United States’ wireless market. These numbers are not close to 68% market share of America Movil in their home market and highlight the advantage of investing in a Mexican company which has a monopoly power on Mexican soil.
Investing in Latin America is not for everyone. This America Movil trades as an ADR and investors are not given the same amount of protection found in domestic U.S. companies. Regardless, America Movil has a strong market share in its home market. Its returns in Brazil are not has high as the returns in Mexico which as placed somewhat of a drag on return on invested capital over the past couple years. The overall higher return on invested capital and earnings yield for America Movil relative to American telecoms is a clear sign that even in the face of difficulties they know how to run a profitable company. Carlos Slim used his understanding in business and politics to become the richest man in the world and there is no reason why the average investor cannot benefit as well.
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