A Contrarian View of America Movil SAB de CV (ADR) (AMX)

America Movil SAB de CV (ADR) (NYSE:AMX), the fourth largest telecom provider in the world, has been a popular target for bears lately, and for good reason. The Pan-American communications giant, founded by Mexican tycoon Carlos Slim, is facing an antitrust decision in Mexico that could break apart its vast empire, which has 261.6 million subscribers across 18 countries.

As a result, sellers have driven the stock down nearly 20% over the past month to a three-year low. But in my opinion, this myopic reaction may have created a buying opportunity for patient value investors with a longer investment time horizon.

The Foolish fundamentals

America Movil SAB de CV (ADR) (NYSE:AMX) generates revenue from wireless and broadband communications, traditional landlines, and a stake in the television business. Wireless communications remains its strongest performer, due to the rapid adoption of smartphones across the America (NYSE:AMX)s.

Let’s break down América Móvil’s subscriber base from its five largest markets. The total subscribers figure – which is mainly relevant in Brazil and Mexico – includes landline, broadband, and television service subscribers in addition to wireless ones.

Source: The Wall Street Journal

In Mexico, America Movil SAB de CV (ADR) (NYSE:AMX) controls approximately 70% of the wireless market with Telcel, as well as roughly 80% of landline services with Telmex. The company controls 24% of the wireless market in Brazil, and 60% in Colombia. These large market shares have kept its revenue growing at a healthy rate over the past three years since the bottom of the recession.

AMX data by YCharts

However, phone service prices in Brazil and Mexico have declined over the past three years, causing operating and profit margins to contract.

AMX Margin data by YCharts

In addition, interconnection fees in Mexico – the rate a telecom company is charged when a customer dials into a competitor’s network – have been lowered by half over the past two years.

This means there is less incentive for customers to have all their friends and families on a single provider, since smaller competitors like Telefónica’s Movistar can offer lower subscription rates that offset the benefit of slightly cheaper calls over a single network. Movistar is America Movil’s fastest growing competitor, with a presence in 14 countries.

Analysts believe that if America Movil SAB de CV (ADR) (NYSE:AMX) were required to sell its assets, Movistar could benefit from buying some of its landline assets. Stifel Nicolaus analyst Chris King believes that if Movistar acquires more landline assets in Mexico, then it could avoid interconnection fees with its mobile customers by offering package deals.

Interconnection fees are also dropping in Brazil, as part of a government initiative to lower rates by half between 2010 and 2015 – making it unlikely for América Móvil to grow its market share in Brazil much further.

The looming threats

América Móvil’s dominant position has made it a target of regulators in Mexico, where the country’s three top political parties, led by President Peña Nieto, have introduced a bill to break up the telecom and television broadcasting sectors in order to lower prices and promote competition. The bill’s supporters are aiming to sign it into law by April 30.

The aggressive move to break up America Movil SAB de CV (ADR) (NYSE:AMX) is similar to the U.S. decision to split up AT&T three decades ago – which reduced prices and spurred the growth of competitors in the telecom industry.

The proposed bill will force telecom and television companies to sell their assets if they control over 50% of their respective markets. It would also empower the Mexican government to impose asymmetric tariffs, which would specifically target large companies such as América Móvil.

The bill will also allow foreign companies to completely purchase América Móvil’s smaller competitors and strengthen them through hefty capital investments – a reversal of a previous restriction which capped foreign investment in landline operators at 49%.

Televisa, the other side of the coin

In addition to América Móvil, Mexican television network giant Grupo Televisa (NYSE:TV) – which controls over 70% of the Mexican television market – is also expected to incur heavy losses if the bill passes. Shares of Televisa slid along with América Móvil after the initial bill passed the lower house vote.

In Mexico, Televisa has been offering “triple-play” combination packages of Internet, telephone and television services at more competitive prices than América Móvil. If the bill passes, then Televisa will lose its dominance of the television market, allowing América Móvil to possibly move back into the Mexican broadcast market.

Until now, America Movil SAB de CV (ADR) (NYSE:AMX) had been barred from expanding into the Mexican television market due to its dominance of the wireless and landline industries, but it could be allowed back in if it reduces its wireless and landline assets.

However, it might be easier for Televisa to enter the telecom market than it would be for America Movil SAB de CV (ADR) (NYSE:AMX) to start up a fresh television business in Mexico. Televisa could easily reduce its share of the television market and fall back on the strength of its Internet and telephone services to disrupt América Móvil’s telecom business, before the latter could even start pushing its television services into the market.

The Foolish bottom line

Despite all the noise and speculation regarding América Móvil’s next move, I believe that its shares are undervalued for several main reasons.

Only 35% of its total revenue comes from Mexico
The company recently repurchased 150 million shares of its stock worth 1.837 billion Mexican pesos ($147.71 million)
Its trailing P/E of 9.86 is well below the industry average of 16.33
Its 5-year PEG ratio of 0.68 is also much lower than the industry average of 1.13.

Considering that much of the 20% plunge over the past month was caused by the drama in Mexico, I believe a lot of its potential losses have already been priced in. The company still thinks its own shares are cheap, and has been actively repurchasing them even as they plunged to a three-year low.

The stock will also pay you to wait, with a decent quarterly dividend of $0.15 per share – a 2.33% yield at current prices. Yet that doesn’t mean that you should rush out and buy this stock right away, but it’s definitely one to keep an eye on, especially if you subscribe to Buffett’s immortal mantra, to “be greedy when others are fearful.”

The article A Contrarian View of América Móvil originally appeared on Fool.com and is written by Leo Sun.

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