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April 23, 2009

NII Holdings: Skies are Clearing

NII Holdings reported better than expected 1Q09 earnings today. I have been torn on this stock for months, particularly since the company pre-announced lower than expected subscriber counts a couple of weeks ago. The quarter has pushed me to the bullish camp and I now plan to hold the shares.

EPS of 43 cents beat consensus handily as costs to add subscribers fell more than expected. Two things working in favor of NIHD's financial result sin 2009 are the facts that lower subscriber additions reduces expenses and the Mexican Peso and Brazilian Real have rallied sharply off their 1Q lows. Continued strong underlying growth excluding currency impact, particularly in Brazil, is also helping.

NIHD has faced lots of issues including reliance on older iDEN technology, tougher competition in Mexico, weak currencies, and the global economic slowdown. These things have rightfully pressured the shares, mostly via massive contraction in valuation multiples.

Despite my respect for the challenges, what was kept me long the stock is the fact that the underlying business continues to grow very strongly. Even after the cut in subscriber growth for 2009, the low end of current guidance calls for an 18% lift in subscribers. In 1Q09, constant currency growth rates were 23% for revenues and 34% for EBITDA. Margins actually expanded despite the economic and competitive headwinds.

NIHD is trading at less than 4 times EBITDA which is feeling a ton of pressure from currency. I think it is awfully cheap on an absolute basis and relative to other emerging market wireless telcos given the growth profile. 1Q09 results suggest strongly that management understands the challenges and has programs in place to sustain a cautious growth strategy. Assuming that economic conditions in Mexico and Argentina do not deteriorate further, the shares have upside to the mid-$20s.

Posted by Steve Birenberg at April 23, 2009 10:11 AM in NIHD