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November 05, 2008
NIHD: Good Quarter, Good Business, Bad Stock.
NII Holdings reported about ten days ago while I was on a plane to NY to visit CETV. The report occurred right as the market was in its most depressed state which was unfortunate as the results were quite good. As soon as I got off the plane I looked at my email to see an initial report from Goldman Sachs stating that HIHD produced an across the board positive surprise. I was excited and called a good friend who owns the stock is his hedge fund only to find out the stock was down 25%! I should have listened to Goldman and bought the weakness as the stock has almost doubled off that morning low and is now above where it was when they reported. I think the next few quarters will be volatile for the shares but more recovery remains assuming the bleak economic outlook does not worsen.
The biggest challenge faced by NIHD shares is the sharp weakening of the currencies of Mexico and Brazil which are the companies two largest and faster growing markets. As of now, the economies of these countries and NIHD's businesses are still performing well. Weakening prospects for global economy will cut into 2009 growth but the bigger issue and risk is that the 30% drop in the currencies against the dollar will undermine positive economic fundamentals and pull NIHD's growth down.
There is little the company can do about the negative impact on US dollar results due to the impact of currency translation. The company could easily growth 15-20% in local currency in 2009 only to see its US dollar results flat to down. I think investors will eventually look through the currency weakness as long as the bottom does not fall out of economic growth in Mexico and Brazil. That is the assumption I am making and why I am holing NIHD shares....
....If currencies do not deteriorate further NIHD will make about the same in 2009 as it did in 2008 in US dollars. This leaves the stock trading at less than 10 earnings and less than 5 times cash flow. For a company with underlying growth of 15-20% I think these valuations are incredibly cheap.
One other positive which hit in the last few days was an announcement that Sprint will refocus on iDEN/Nextel which is the service NIHD sells. Nextel US is a much larger company than NIHD. There had been worries that Spring would abandon Nextel which would lead Motorola to stop development of the technology and leave HIHD out in the cold. Having this possibility off table sets the stage for a stronger recovery in NIHD if the economic improves and currencies strengthen.
Posted by Steve Birenberg at November 5, 2008 09:09 AM in NIHD
1 why do you think cetv continues to lag the market in rallies?
2 With the loss of leverage,some analysts feel that the downward pressure associated with this loss of concomitant buying ability will take years to reverse? Today, the employment figures were bad suggesting no end in sight to this recession.
Do you still think the market may start risng mid year in 2009- or do you think the market will stay damaged till 2010?
p.s Do you think there is any chance of even a small end of year rally in 2009?
Is there any logical way to deal with this crazy,fear driven market-e.g. buy on dips/sell on rallies; investing in high dividend stocks;buy/hold on high beta stocks like cetv which have been badly beaten up; or stay all in cash.
I was traveling Thursday and Friday. Sorry for the slow response.
1. My experience with broken stocks is that they do not attract buy interest in initial rallies. They need to prove themselves again. CETV has the added problem that it has exposure to emerging mkt currency and advertising two pariahs. Look at DISCA on Friday. They reported good results and the stock had a huge rally. CETV needs to report good results to really get the stock moving.
2. I think a new trading range is being establish from 900-1000 onthe S&P. Unfortuantley risk rmeains to the downside as investors are having a hard time dealing with EXPECTED negative news. When we can ignore negative news and be sable or rally is when the mkt can breakout to the top of trading range.
I do think that economic numbers will begin to improve in 2H09m especially 4Q09 due at least to very comparisons. The market should rally 3-6 months ahead of that if it sees the current situation stabilizing so that it can look forward. That is my working assumption.
Until that time I think cash is fine unless you want to try your hand at trading. A bear market can't be dealt with.
Posted by: Steve at November 8, 2008 11:27 AM