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October 26, 2007

NII Holdings Gets Abused

NII Holdings, (NIHD) had a rough day yesterday. Following its 3Q earnings report and conference call before the open, the shares fell 20%. The loss was on top of a decline of 15% already this month. Heading into the report the shares had been under pressure due to worries about growth in Mexico, the company's largest market. Fears about competition and the back-to-back-to-back hurricanes that hit in August had investors anticipating a miss. Mexico is critically important to NIHD shares because it accounts for 55% of revenue and 63% of EBITDA so far in 2007. Furthermore, the company just completed the build out of its network in Mexico and estimates for 2H07 and 2008 contain a big benefit from accelerated growth in revenue and subscribers and expanding margins.

NIHD reported fine headline numbers. Revenues of $853 million and EBITDA of $235 million both slightly beat estimates. Adjusted EPS of 61 cents beat consensus. Subscribers grew 38%, revenue grew 39%, EBITDA, grew 49%, and net income grew 58%.

So what the hell happened? First, net subscriber additions in Mexico were just 140,000, about 20,000 under consensus. Competition and weather were said to be equal culprits. Analysts delved deeply into the competition angle and are clearly worried about its intensity. Second, cost per gross subscriber addition in Brazil rose year-over-year. Brazil is NIHD's second largest market and is on the same path as Mexico with a plan to build out the network over the next few years currently in place. Subscriber, revenue, and operating income results in Brazil were at least as expected but that did not contain worries that Brazil is also becoming more competitive.

While the stock got murdered, management was firmly upbeat about its prospects in Mexico and Brazil....

....They admitted that recently raised subscriber guidance for 2007 might be a stretch but there was no concern expressed about long-term growth. Management also noted several other instances over the past five years where competitive intensity picked up in its markets only to settle down in several quarters.

So why did the stock get killed? Clearly, NIHD has been a huge winner and a momentum stock. No slip allowed in this type of stock. Add in a well earned significant premium valuation and there was lots of room to fall. I think the poor stock action earlier in October compounded by the miss also led to momentum selling. "Surely something horrible must be going on at NIHD" had to be the reaction of aggressive traders. Finally, when pressed about its share buyback program, management said it would not commit to an acceleration in activity after the recent stock price decline. Given that the company has $1.5 billion in cash and just a little over $2 billion in debt, this is not exactly a vote of confidence.

I am still working on my spreadsheet but if I shave next year's numbers by 5%, you still get 32% revenue growth and 34% EBITDA growth. I have the stock trading at under 9 times the reduced 2008 EBITDA. Still a premium to other emerging markets wireless stocks but find me a comparable that has all postpaid customers, average ARPU of $58, and as good a track record of meeting and exceeding quarterly estimates for the last five years.

The stock is in the penalty box until competitive trends in Mexico and Brazil get sorted out favorably. However, the decline yesterday was way overdone. For now, pending further review, I think $65 is an easy rebound once everyone settles down. Once it gets there, I'll reevaluate whether to hold the position. A good fourth quarter would get the stock back to the mid-$70s so there is reason to show patience.

Posted by Steve Birenberg at October 26, 2007 01:36 PM in NIHD