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March 09, 2009

NII Holdings: Business Holding Up, Stock Going Down

NII Holdings (NIHD) reported 4Q08 results and provided 2009 guidance at the end of February. I thought the 4Q figures were quite good considering the economic environment but the stock sold off sharply due to guidance that was below estimates. However, the guidance miss was due to foreign currency, in particular, the weakness of the Mexican Peso. The currency impact has been obvious for many months so I think the reaction of analysts (lowered estimates) and investors (sell, sell, sell) was too harsh.

The stock bottomed out at $10.12 but has rebounded over 20% since Goldman Sachs upgraded the shares on March 3rd. Goldman's argument is basically the same as my reason for continuing to hold the stock: underlying fundamentals are holding up and the stock is incredibly cheap.

On the fundamental front, despite currency pressures, revenues in Mexico grew at a 22% annual rate in 4Q08. In Brazil, annualized revenue growth was 41%. In local currency terms the company grew revenues by 25% but reported revenue growth after conversion to U.S. dollars was 5%. The currency impact on revenues was much larger than the cost savings those same currency swings trigger so margins contracted and EBITDA fell 7% on a reported basis. In local currency, EBITDA rose over 20%.

These positive underlying fundamental trends on the income statement were the results of resilient trends at the subscriber levels. Subscribers grew 31% year over year and were up 6% sequentially. Net adds were up 6% vs. a year ago but continued their sequential slowdown. Subscriber churn stabilized and ARPU in local currency was stable, even in Mexico where competition has been intense and pricing had been falling.

The balance sheet remains very strong with $2.1 billion in debt, $1.3 billion in cash, and net debt to EBITDA of about 0.8 times. The company does need capital to buy next generation spectrum and build out the network. This will cost up to $2 billion but these costs have fallen and the need to upgrade is less urgent due to the economy. NIHD faces minimal balance sheet stress and will have no problem accessing the capital it needs.

The guidance calls for EBITDA of $1.0 to $1.1 billion, 1.3 million new subscribers, and revenues of $4.2 billion, unchanged from 2008. Assuming that NIHD comes close to these figures the stock looks really cheap at 3 times EBITDA and 6 times earnings. NIHD has one of the lowest valuations for telecom stocks in the world but its business is holding up well compared to its peers and its long-term growth profile is superior.

The biggest risks in the near-term are that 1H results decelerate unexpectedly relative to guidance and that currencies weaken further. The company gave guidance at the end of February which suggests that 1Q09 fundamentals should be OK. The Mexican Peso has weakened another 2% since the report posing further translation risk.

In the long-term, the risks remain what they always have been. NIHD uses an older technology with only one supplier and needs to spend to upgrade. NIHD also faces intense competitive pressure, particularly in Mexico, its largest market.

I like NIHD shares because they have the potential to be a huge winner when the market gets straightened out. If currencies stabilized, reported growth would reaccelerate to 20% plus and the multiple of earnings or cash flow could expand by 50-100%. This could push the stock back up to the $30s or higher.

The bottom line is that NIHD is still a healthy company pretty deep into the global economic crisis. This suggests that its chances of emerging as a growth stock are pretty high. The stock is priced as though results are going to get much worse before they get better and the time horizon until growth resumes is years away. I think this has created a disconnect which makes NIHD a good, albeit aggressive, high risk-reward, stock to own today.

NIHD is held in Northlake client accounts including my personal accounts.

Posted by Steve Birenberg at March 9, 2009 01:19 PM in NIHD