America Movil SAB de CV

America Movil grew revenue 5.1%, adjusted for currency movements, during the second quarter, in line with the recent past year, excluding the benefit of the acquisitions. Free cash flow was especially strong, more than doubling to MXN 33 billion ($1.9 billion) year to date.

Why it matters: Mexico, Movil's most important market, has bounced back strongly. Wireless service revenue increased 6.6%, the best pace in three years, on accelerating prepaid growth, likely indicating consumer demand has jumped amid a stable competitive environment. While regulators have delayed efforts to register wireless phone numbers, the registration push has still muted customer growth in Mexico. But revenue per customer increased 6%. With the strong peso, revenue per customer topped $11 per month for the first time in more than a decade. We remain concerned with Movil's aggressive stance in Brazil, its second-largest market. The firm continues to rapidly add wireless customers, but revenue per customer increased only 2%. However, other markets continue to show improving competitive dynamics, including Colombia and Central America.

The bottom line: We increase our fair value estimate to $24 per ADR from $23, primarily on higher assumed Mexican wireless revenue. We maintain our narrow moat rating. Share repurchases remain modest, allowing free cash flow to reduce net debt by MXN 40 billion during the first half of the year. Movil announced a small acquisition in Peru along with earnings, but it still has the financial capacity to undertake a major deal if it chooses. We aren't clear what a major deal might look like. Fortunately, in our view, management commented that it is not looking to enter new markets, but rather wants to drive consolidation where it already operates.

Our $24 per ADR fair value estimate uses an exchange rate of MXN 17.4 to $1.00. We believe Móvil’s competitive position is strong enough in most countries that it can increase prices to offset local inflation and currency weakness, though this process generally takes time, especially when economies are weak. However, we expect the opposite will also prove true, with prices harder to increase when inflation is low and currencies are strong.

We expect Móvil’s performance in Mexico will benefit from a favorable market structure, with only AT&T possessing a comparable nationwide wireless network. Over the long term, we expect Móvil to slowly lose market share in the country, but stable pricing gains will allow wireless service revenue to grow about 3% annually. We still don't expect revenue per customer, in US dollar terms, to reach 2014 levels over our forecast, remaining around $13 per month in 2030 based on the current exchange rate.

In the Mexican fixed-line market, we expect the transition to a fiber-optic network and away from traditional phone service will allow revenue to hold roughly steady over the coming years, though we believe this market needs consolidation to reduce competitive intensity. If Móvil’s fixed-line rivals were to merge, we suspect price competition would moderate, and our growth outlook would prove conservative. We expect Móvil’s dominant scale to allow EBITDA margins in Mexico to remain stable at 41%-42% over the next five years.

Móvil’s performance in Brazil has been disappointing in the past, but it has improved recently thanks to wireless consolidation. With an extensive broadband network and nationwide wireless presence, the firm should be able to bundle services efficiently. We expect the firm’s high-quality assets in the country to allow growth to remain in the mid-single-digit range over the next five years, driven by gradually increasing wireless market share, improved pricing, and growing broadband penetration. As Móvil better leverages its assets in the country, we expect margins to improve modestly as well.

Competition has pressured results in Colombia, but signs of improvement have emerged. We increased our growth expectations to 4% annually over the next five years from 3% earlier this year, reflecting a much-improved competitive situation. We still expect that Móvil will lose wireless market share, given its dominance today. However, we believe competition will grow more rational over time as rivals consolidate, allowing pricing to improve.

Across the rest of Latin America, we assume growth and profitability remain consistent with recent performance. Finally, we expect no major changes in the performance of Móvil’s European investments, with A1 Telekom Austria generating modest growth and consistent margins.

While América Móvil provides services in more than 20 countries, Mexico, Brazil, and Colombia are its most important markets, providing about two-thirds of total revenue and profits. The firm’s operations in these three markets include extensive network assets that often provide efficient scale and cost advantages. Operations in most other countries have similar characteristics. We believe Móvil carries a narrow Morningstar Economic Moat Rating, with its dominance in several markets tempered by the threat of regulatory intervention.

América Móvil’s Mexican wireless business, Telcel, which generates about 25% of the firm's service revenue, dominates the market. In addition to the efficient scale attributes typical of wireless markets globally, the Mexican wireless business also enjoys cost advantages that few carriers around the world possess. The firm holds about 60% market share, based on total customers, with wireless service revenue about 4 times that of its nearest rival (AT&T). Based on government data, Móvil’s wireless network carries around 75% of the total data and phone traffic in Mexico. The relative scale of this magnitude creates a large cost advantage, as providing broad, high-quality wireless coverage and marketing services requires heavy fixed costs, best spread over as large a customer base as possible.

AT&T acquired two subscale, struggling Mexican carriers in 2015 and has built network coverage that rivals Telcel’s. However, the price wars that hit the market following AT&T's entry hurt third-place carrier Telefonica particularly hard, prompting the firm to exit the market in 2019 as a facilities-based operator. Walmart entered the Mexican wireless business in 2021, and its reported customer base has grown rapidly. However, Walmart utilizes a government-sponsored wholesale network to provide service. This network provides limited coverage and capacity. Most Walmart customers are infrequent users, generating very modest revenue.

In the Mexican fixed-line business, Móvil’s Telmex subsidiary, which generates a bit more than 10% of firmwide revenue, has struggled to maintain its position in recent years. Segment disclosure isn’t great, but we don’t believe this business enjoys a moat. The firm is the only major traditional phone company in Mexico, but its network reach is limited to around 65% of the Mexican population. Two cable competitors, Grupo Televisa and Megacable, have aggressively expanded networks across the country. Newer entrant TotalPlay has also aggressively expanded its fiber network over the past five years. In many areas, customers can choose from three or four broadband providers, which has resulted in fierce price competition and poor returns on capital for all players.

Regulatory pressure within Mexico remains a major limiting factor on our moat rating. Móvil must allow competitors to access its passive infrastructure, including towers and rights of way, and certain other network elements. The Mexican government has also created a new telecom regulator, which could lead to more onerous regulation in the future. That said, no firm invests as heavily in Mexican telecom infrastructure as Móvil, which gives it some leverage to push back against regulators.

In Brazil, Móvil has invested aggressively over the last two decades to enter and expand its presence in the market, which now provides a bit less than 20% of the firm’s revenue. We believe the firm has a solid position in the country, combining a nationwide wireless business and a strong fixed-line network, but economic weakness and the market’s structure have limited returns on capital. Móvil is the largest cable company in the country and has about 20% share of the broadband market nationwide. However, heavy network investment at a multitude of small firms has eroded the firm's position. Telefonica (Vivo) has also invested heavily to improve its network, and the network of former telecom incumbent Oi has been repositioned as a wholesale provider after the assets were acquired out of bankruptcy. Similar to Mexico, we believe the fixed-line market is in dire need of consolidation to allow carriers to earn acceptable returns on capital.

Móvil is the second-largest Brazilian wireless carrier, trailing only Vivo and holding an advantage over TIM. Móvil, Vivo, and TIM recently carved up Oi’s wireless business, leaving only three major wireless carriers in the country. The Brazilian wireless market has historically been extremely competitive as carriers raced to secure market share. Years of brutal competition have left the market accustomed to low prices. Competition has eased, but we believe wireless prices across the industry need to move steadily higher to allow carriers to earn acceptable returns on their spectrum and network investments.

Overall, Móvil’s business in Brazil generates modest returns on capital. Outside of acquisitions, revenue in the country has been fairly stagnant in recent years, with declining fixed-line phone and television revenue offsetting wireless and broadband growth. The EBITDA margin has expanded somewhat, hitting 44% recently versus 37% in 2019, but the business has also consistently invested around 20%-25% of revenue annually in its networks and spectrum licenses.

América Móvil is the dominant wireless carrier in Colombia, a market that generates a bit less than 10% of its revenue and EBITDA, with nearly 55% market share. The firm also owns cable networks reaching about half the population. As in Mexico, this scale has enabled the firm to produce strong EBITDA margins and operating income. The Colombian wireless market became more competitive following the entry of WOM as a fourth major carrier. However, rival Millicom recently acquired Telefonica's Colombian business, bringing much-needed consolidation to the market.

América Móvil has unmatched scale in the Latin American telecom market. It serves far more wireless customers in the region than any other firm and holds the leading share in Mexico, Colombia, and Argentina, and the second-largest share in Brazil.

A strong balance sheet, combined with continued stable cash flow, should enable Móvil to maintain financial flexibility while steadily increasing shareholder returns.

Móvil has deep experience dealing with the political and regulatory nuances of the Latin American market.

Regulators often take aim at dominant carriers, like América Móvil, that they believe have stifled competition or inhibited investment. There is no telling how far regulators will ultimately go to curb Móvil's market position, especially in Mexico.

Stiff competition, regulatory pressure, and general economic weakness have often hurt Móvil’s performance. Latin America is likely to remain highly volatile along these dimensions.

Móvil is highly exposed to the US dollar, with many expenses and a large portion of its debt load denominated in the currency.