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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