Sold NII Holdings on Swine Flu Fears

I sold all Northlake positions in NII Holdings (NIHD) this morning in response to the threat that swine flu could have on the company's business and reported financial results. The stock has rebounded about 60% off its low from a month ago as investors were beginning to again appreciate the strong organic growth profile of the business that I have written about extensively and favorably.

Given the strong run in the shares, I fear the stock is in for a bout of profit-taking and swine flu presents the perfect trigger given that Mexico is NIHD's largest market. Growth in Mexico is already under pressure due to competition and economic pressures. Swine flu could exacerbate the challenges severely if it expands in Mexico as appears may be the case. The Peso has dropped a quick 5%-7% in response to the threat to Mexican tourism. This compounds the impact on NIHD which reports in U.S. dollars.

Swine flu may pass quickly from the headlines with limited economic impact in Mexico. However, NIHD could take a harsh hit, 20% or more if the flu lingers. This created a poor risk-reward tradeoff for the stock in near-term so I decided to sell despite my generally bullish view of the company.

Prudence says to sell. NIHD can always be bought back.

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.

NII Holdings Gets Downgrades

I was hoping for a stronger defense by the analyst community after NIHD fell 18% yesterday following pre-announcement of lower than expected 1Q09 subscriber growth. The stock caught two downgrades and one analyst who has a buy lowered his price target. Goldman reiterated the buy noting that the change was minimal relative to its own already conservative estimates. NIHD trades at less than 4 times EBITDA, even assuming EBITDA below current guidance. I am still not so sure the lower sub growth will translate to lower EBITDA as new subs cost money to acquire including handset subsidies. Furthermore, the Mexican Peso and Brazilian Real are both much stronger than when NIHD issued its guidance in late February. I remain torn over NIHD. Clearly challenges exists but the stock is awfully cheap esepcially considering that even at new lower sub growth forecast, subs will be up 18-20%. Can you find similar growth elsewhere?

NII Holdings Guides Subscribers Lower

NIHD is down 19% after announcing its 1Q subscriber figures. The numbers were below expectations and the company lowered its full year subscriber forecasts. Especially troubling was weakness in Mexico, the company's largest and most challenging market. No change was made to full year financial guidance but an update was promised on the 4/23 1Q earnings call. The news on financial figures amy not be so bad as subscriber growth brings acquisition expenses and handset subsidies. Also, Peso and Brazilian Real have strengthened since 2009 guidance was given.

This is a tough blow in the near-term for NIHD bulls, including myself. I am inclined to sell if the stock lifts as analysts defend it. Waiting to hear from Goldman which recently upgraded when the stock was near $11. I am torn because even if growth slows, NIHD remains a double digit growth stock at the operating and subscriber level. Not many of those in the world. Management is top notch and EBITDA multiple is really low.

Technology Risk at NII Holdings

Pali Research is out with a new report on NII Holdings (NIHD). They are reiterating their buy and establishing a $25 price target. The cut estimates further and moved below management guidance but attributed 90% of the reduction to further weakening in the Mexican Peso.

In my recent update on NIHD, I explained that underlying fundamentals are holding up quite well considering the economic crisis and the company still has an excellent growth profile. This was the basis for Goldman Sachs recent upgrade which has triggered a 40$ rally in NIHD off its low. The next big move is going to come from a better market environment and a strengthening of the Peso. Pali's $25 target is realistic if those things happen.

Pali's new report touched on something I did not address on detail: NIHD's technology risk. This has always been a worry of investors as the company is one of the few in the world to use Motorola's iDEN standard. iDEN is superb for push-to-talk which is well known in the U.S. as the key feature of behind Nextel's success. Over the last years. However, iDEN has been viewed as a weakness for NIHD. Pali addressees this effectively. Here is a brief summary of the technology challenges Pali identified.

iDEN has limited phone choices. This is true but especially in Latin America, NIHD is targeting a customer base that cares more about voice communication and basic email than feature available on the latest smartphones. For customers desiring voice and email based features, the technology works better than most others and is cheaper to provide. NIHD believes there is plenty penetration left among businesses who can effectively sue its services.

iDEN requires major upgrades to compete with 3G and 4G competitors. 3G networks require a lot more capacity that NIHD's iDEN networks do not have. However, as noted above, NIHD customers are not demanding the advanced services especially because 3G networks do not work nearly as well for push to talk which is used heavily by NIHD's subscriber base. Pali estimates over 50% of minutes of MIHD subs are push to talk.

NIHD is not a takeover candidate due to incompatible technology. As a small company with a high quality customer base that is growing quickly, NIHD should be an attractive takeover candidate. Pali points out that recent signals form NIHD about the cost of technology upgrades for iDEN are not so large as to erase all gains an acquirer would receive. I do not even consider NIHD as a takeover candidate in my decision to own the shares but it is nice to know the possibility is out there.

Motorola's handset is dying and support for IDEN will end. Motorola has publicly stated its commitment to iDEN in relation to talks with Sprint. While it is not a huge business it is still steady and even growing while the rest of Motorola's business is declining. I think this is the biggest risk to NIHD shares form a technology perspective, especially initial reaction were Motorola to end support of iDEN.

Overall, technology is an overhang for NIHD. Upcoming spectrum auctions in Mexico and Brazil followed by effective buildout of the spectrum and upgrade to 3G technology with no degradation of push to talk capability will resolve the technology issues. The question is ultimately the cost and quality of the upgrade. At current prices of NIHD I think the shares more than incorporate the technology risk.

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

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.

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.

NII Comes Through and the Sentiment Turns

What a difference a day makes! After Tuesday brought nothing but bad news for wireless investors, NII Holdings (NIHD) reminded us that there can still be winners in the group.

NIHD jumped almost 8% at the open and built on the gains to close 11% higher. The company reported great 2Q08 results with pretty much ever key metric coming I ahead of analyst estimates. This marks the second consecutive quarter where the company reported upside. This time it is enough to rebuild confidence and put an end to lingering negative sentiment form the stocks crash form $90 last summer to a low $30 as worries mounted over its iDEN technology and competition in Mexico, its largest market. The whole tone of the conference call was improved. I think it marks a turning point and with a little help form the market the stock can get back to the $60s before year end.

NIHD is a dynamic growth company. ..

....In 2Q, revenues grew 40%, EBITDA grew 48%, subscribers grew 34%, and EBITDA margins expanded. Currency helped but the organic growth rates are in the 30% range. Net adds grew sequentially. Mexico enjoyed 24% revenue growth and expanding margins. Brazil, the #2 market, is blazing. Revenues up more than 70% for third straight quarter, EBITDA doubled, subs up 41%, net adds grew sequentially for the tenth straight quarter.

In the press release and on the call, management stated it is on track to meet or exceed guidance. Estimates are headed up. The stock is trading at 8.8 and 7.0 times 2008 and 2009 EBITDA. That is a premium to the group but one that NIHD has always held and had earned prior the sentiment shift when serious questions about the sustainability of growth arose about a year ago. NIHD is back and so is the premium.

NII Holdings: Another Solid Quarter Supports More Stock Recovery

NII Holdings (NIHD) 1Q08 results were at the high end of expectations pretty much across the board. Given many worries that had cut the stock in half in the last six months, the results provided relief. The shares rose 8% yesterday, building on a recovery that is now approaching 50% from the February low. I think there is plenty more to come.

NIHD reported revenue, EPS, EBITDA, and subscriber growth of 39%, 35%, 36%, and 35%, respectively. Each figure tracks above full year guidance for 30% growth. NIHD trades about 7 times my 2008 EBITDA expectation and less than 15 times consensus earnings estimate. For 30% growth and a history of superb execution, I think that is pretty cheap. Granted the valuation is in line with other emerging markets wireless companies but until worries emerged over competition in NIHD's largest market, Mexico, and in its technology platform (iDEN), the shares traded at twice its peer group valuation.

This is the second consecutive quarter of good results since the fears manifested last summer and fall. I think some of the premium will return as the company kicks out another few quarters of solid results showing 30% plus growth. The need to upgrade current networks and add spectrum means that the company will be spending several billion in capital starting within a year but the balance sheet is solid with net debt to EBITDA at just 0.5 times my 2009 estimate. I think the shares will work steadily higher given a decent market toward my near-term target of $60. I am considering averaging down again, an opportunity that might present itself when the market is weak and the company bids for spectrum and/or formally announces its network upgrade.

NII Holdings: Finally In The Clear?

NII Holdings (NIHD) reported better than expected 4Q07 financial results yesterday but the shares sold off sharply anyhow. I can see three potential issues. First, EBITDA guidance is a bit low even after adding back the $30 million in unexpected expenses related to upgrading the company's network in Peru to 3Q. Revenue guidance is in line so there is some evidence of margin pressure. Second, the Peru 3G build out is again raising fears of a big spike in capex for the rebuild in Mexico and Brazil. Third, 1Q08 net adds will be down sequentially. They were up sequentially in 2007 and flat in 2005. This serves to undermine the fragile confidence that guidance is good and the Mexico situation is stable.

By way of background, NIHD shares have been cut in half since last summer when competitive activity in the company's largest market, Mexico, picked up. Sub growth in Mexico slowed, ARPU trends deteriorated, margin expansion stopped, and talk of the need for massive network upgrade moved front and center. Analysts lowered subscriber and financial estimates in response.

I think the shares are way oversold and that as time passes, maybe one or two quarters, the shares will move up considerably. Ultimately, 4Q07 sub and financial results beat the lowered estimates. These results show that management can handle the more competitive environment in Mexico and still “EXCEED” numbers. This makes me believe that the 2008 EBITDA guidance is likely low, especially given momentum in Brazil, which no represents 30% of subscribers and 25% of EBITDA....

....In addition, the per pop build out costs for 3G in Peru suggest that the entire build out can be done for a few billion, far less than some people are assuming and something the company can easily finance given their balance sheet rapidly rising free cash flow that should explode starting in 2009.

Finally, even on the conservative guidance we are looking at 29% revenue growth and 27% EBITDA growth in 2008 for a stock that is trading at 7 times EBITDA and 15 times EPS with a Board that is willing to buyback meaningful amounts of stock. Helping matters more, NIHD just beefed up the management team adding the very successful CEO from Dobson Communications (just purchased by AT&T). The stock lacks a catalyst until 1Q numbers are out but I think it should be held or slowly accumulated. Longs will just have to tough it out for another few months.

P.S. I am no technician but does the fact that the huge volume decline yesterday held in the recent trading range indicate that sentiment is washed out to the downside? [UPDATE 2/29 11:45: Maybe so seeing as the shares are up tow days in a row even with a terrible market]

NII Holdings Gets Back On Track

Yesterday, NII Holdings (NIHD) announced better than expected 4Q07 subscriber growth, completion of a large buyback, initiation of another buyback, and an impressive new CEO. The shares were up 9.5%. I added NIHD to a new account, the only one I have that didn’t already own a full position, just after the open yesterday and now think the shares could head quickly back to the $60s in a cooperative market.

The key element that drove the gains in NIHD shares was the announcement that 4Q subscriber growth was good enough to beat full year guidance. Significantly, subscriber growth in Mexico reaccelerated following a surprising sequential dip in 3Q07 due to increased competition. Following 3Q07 results, most analysts reduced their total company and Mexico subscriber estimates to below where 2007 ultimately came in. This sets up a round of estimate increases. If analysts don't increase estimates, look for positive surprises later this year. Also contributing to the stock price gains was the surprising announcement that NIHD completed its $500 million share buyback and initiated a new buyback of the same size. One thing that contributed to the stock getting cut in half in 2H07 was the fact that on the 3Q07 conference call management said it would not get aggressive with its share buyback. Analysts and investors took this as a sign that management was not confident in the future. Kudos to Pali Research which noted in mid-November after a meeting with NIHD management that they sensed the company was looking at much larger share buybacks....

....NIHD produced 36% subscriber growth in 2007 across its footprint of Mexico, Brazil, Argentina, Peru, and Chile. Sub growth at NIHD translates to similar revenue growth and faster EBITDA growth as stepped network investment in Mexico and Brazil gets spread over a rapidly growing customer base. EBITDA growth in 2008 should be around 30%, possibly slightly higher now that 4Q sub growth looks OK. In 2009, EBITDA could grow by 25%. I think the shares are a bargain at just under 8 times 2008 EBITDA and just over 6 times 2009 EBITDA. Growth is hard to come by in the current market and economic environment. NIHD offers it at a cheap price and management proved again in 4Q that its stellar reputation is well deserved.

NII Holdings Gets Abused

NII Holdings, (NIHD) had a rough day yesterday. Following its 3Q earnings report and conference call before the open, the shares fell 20%. The loss was on top of a decline of 15% already this month. Heading into the report the shares had been under pressure due to worries about growth in Mexico, the company's largest market. Fears about competition and the back-to-back-to-back hurricanes that hit in August had investors anticipating a miss. Mexico is critically important to NIHD shares because it accounts for 55% of revenue and 63% of EBITDA so far in 2007. Furthermore, the company just completed the build out of its network in Mexico and estimates for 2H07 and 2008 contain a big benefit from accelerated growth in revenue and subscribers and expanding margins.

NIHD reported fine headline numbers. Revenues of $853 million and EBITDA of $235 million both slightly beat estimates. Adjusted EPS of 61 cents beat consensus. Subscribers grew 38%, revenue grew 39%, EBITDA, grew 49%, and net income grew 58%.

So what the hell happened? First, net subscriber additions in Mexico were just 140,000, about 20,000 under consensus. Competition and weather were said to be equal culprits. Analysts delved deeply into the competition angle and are clearly worried about its intensity. Second, cost per gross subscriber addition in Brazil rose year-over-year. Brazil is NIHD's second largest market and is on the same path as Mexico with a plan to build out the network over the next few years currently in place. Subscriber, revenue, and operating income results in Brazil were at least as expected but that did not contain worries that Brazil is also becoming more competitive.

While the stock got murdered, management was firmly upbeat about its prospects in Mexico and Brazil....

....They admitted that recently raised subscriber guidance for 2007 might be a stretch but there was no concern expressed about long-term growth. Management also noted several other instances over the past five years where competitive intensity picked up in its markets only to settle down in several quarters.

So why did the stock get killed? Clearly, NIHD has been a huge winner and a momentum stock. No slip allowed in this type of stock. Add in a well earned significant premium valuation and there was lots of room to fall. I think the poor stock action earlier in October compounded by the miss also led to momentum selling. "Surely something horrible must be going on at NIHD" had to be the reaction of aggressive traders. Finally, when pressed about its share buyback program, management said it would not commit to an acceleration in activity after the recent stock price decline. Given that the company has $1.5 billion in cash and just a little over $2 billion in debt, this is not exactly a vote of confidence.

I am still working on my spreadsheet but if I shave next year's numbers by 5%, you still get 32% revenue growth and 34% EBITDA growth. I have the stock trading at under 9 times the reduced 2008 EBITDA. Still a premium to other emerging markets wireless stocks but find me a comparable that has all postpaid customers, average ARPU of $58, and as good a track record of meeting and exceeding quarterly estimates for the last five years.

The stock is in the penalty box until competitive trends in Mexico and Brazil get sorted out favorably. However, the decline yesterday was way overdone. For now, pending further review, I think $65 is an easy rebound once everyone settles down. Once it gets there, I'll reevaluate whether to hold the position. A good fourth quarter would get the stock back to the mid-$70s so there is reason to show patience.

NII Holdings Falls Sharply on Brazil News

Yesterday NII Holdings (NIHD), one of Northlake's long positions, fell by more than 5% on huge volume. At one point in the morning the shares were off over 10%. NIHD operates Nextel service in Mexico, Brazil, Argentina, Peru, and Chile. I heard of several reasons for the sharp sell-off. Most of the concern centers on Brazil, NIHD's second largest market, accounting for a little less than 25% of EBITDA of 2Q07 EBITDA and an important high growth market for the company's future. First, Brazil completed new spectrum auctions this week and indicated more auctions are coming. Once the spectrum is built out, Brazil will have four or five nationwide carriers raising fears of increased competition. Second, on Monday, Brazil's telecom minister indicated that pricing of prepaid wireless services was way too high, above other emerging markets on an absolute basis and in relation to Brazilian post paid pricing. Independent of Brazil, I heard that Merrill cut numbers for NIHD slightly for 3Q but I was unable to confirm it.

I can see why there would be selling in NIHD on this stuff but the huge volume decline at the peak yesterday just shows how stupid Wall Street can be sometimes. Just a bunch of lemmings that see something down big and either sell without asking or short without asking. After all most of this news was out earlier this week and the spectrum auctions have been in the works for months.....

....As noted, in 2Q Brazil was less than 25% of EBITDA. Granted it is a high growth country and worth more than that in the valuation. Let’s say it is worth 40% of the valuation. Should that have been marked down by 25%? Given the fact NIHD does not do prepaid, is a small player presently and a clear market share gainer, and offers a differentiated product, it seems fears are way overdone. Furthermore, observers are saying that the likely outcome of the telecom minister's comments is a reduction in telecom taxes in return for guarantees of lower pricing from operators. The tax reduction would benefit NIHD as would the increased minutes of use as wireless becomes cheaper. It's not a sure thing positive by any means but it certainly presents a more balanced view than yesterday's trading would indicate.

The stock ain’t cheap. It has one of the highest multiples in all of wireless. It has emerging markets risk. All that makes it unusually sensitive to any issue that crops up. This new stuff may be an issue but assuming you thought so and that the market holds in there, you would get a much better chance to sell than current prices. I, on the other hand, added to the stock for new accounts and where positions too small into yesterday's decline.

Bullish News For NII Holdings

NII Holdings (NIHD) shares rose over 3% yesterday following an announcement that the company would be issuing $1 billion in new convertible notes and buying back $500 million shares. Four million shares will be purchased contemporaneously with the closing of the convertible offering. Full use of the authority will retire about 3% of the outstanding shares. Essentially, NIHD is buying back shares at current prices and selling an option to buy shares near $115. The message is quite positive.

The convertible will have attractive pricing from the NIHD perpsective with around a 3% coupon and a conversion premium of 45-50%. NIHD stated that proceeds of the convertible and the green shoe if exercised would be used for the possible purchase of spectrum or other telecom assets, accelerated build out of the networks in Brazil and Chile, the balance of the share repurchase authority, the refinancing of other debt, and general corporate purposes.

Analysts applauded the move and reiterated their mostly bullish recommendations. NIHD is about to finish the build out of its Mexican network leading to a surge in operating margins and free cash flow. By authorizing and executing a share repurchase at current prices, management is showing great confidence in the business outlook and strongly indicating what the use of free cash flow will be in the future. Not to be overlooked is the fact that share repurchase is being completed following a doubling of the share price in the last 18 months and with the shares near all-time highs....

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NIHD is also financing its future growth at an attractive price. The suggested use of funds to expand networks in Brazil and Chile and possibly add spectrum and hard assets in existing or new markets is exactly as the street has expected.

I think the market got it exactly right by bidding NIHD shares up sharply on this news. My spreadsheet calculates a target price of $97 on what I believe will prove to be conservative estimates for 2007 revenues and EBITDA. Management's announcement and the Board's action appear to confirm my bullish outlook for NIHD shares.

Excellent Results From NII Holdings - $100 Stock Price Within Reach

NII Holdings (NIHD) 1Q07 numbers were virtually on top of my estimates across the board. Every financial and subscriber number on a corporate and country-by-country basis was right on target. Since my expectations were at the high end of the street estimates, this sets the stage for upside to current estimates later in the year. Despite the strong results, NIHD did not increase its won guidance but this is not anything to be concerned about as the company has typically waited until the second quarter conference call to update guidance.

NIHD has a history of beating estimates and its own guidance and momentum coming out of 1Q is excellent. Subscriber growth, revenue, margins, EBITDA, and free cash flow are all poised to accelerate as the build out of its network in Mexico and Brazil winds down later this year. Subscriber growth in 1Q in both markets was a little ahead of expectations setting up really strong operating leverage later this year and in 2008. Even more encouraging, the cost to acquire customers in 1Q was lower than expected. Normally, when a cellular company acquires more customers than expected operating income is below expectations because of the cost of acquiring the extra customers. If NIHD can sustain the lower cost per gross subscriber addition, operating leverage will be even better than expected....

In other news, NIHD announced that its long-time CFO would be moving to a newly created business development position and new CFO has been hired. Both the individuals are highly regarded so there is nothing negative to read into the news. It is possible that the beefing up the management could mean that expansion beyond the current five markets into other Latin American countries is possible. Depending on the timing and financing of such a move it could be positive as it would exnted the growth profile on NIHD into the future. Personally, I'd like to see it be a late 2008/2009 event so that the company can bank the operating leverage and prove to the street that entering significant markets is well worth the investment.

Barring a general setback in emerging market equities (NIHD offers iDEN service in Mexico, Brazil, Argentina, Peru, and Chile), I think investors will begin to look ahead to what should be extremely good 2008 results. The shares can comfortable trade at $90-100 on current 2008 estimates which if history is a guide are probably too low. Were the company to meet the top end of current analyst estimates for 2008, upside would over $100. I think that is a realistic target for late in2 007 if 2Q follows a similar pattern to 1Q and estimates and guidance are increased.

NII Holdings Reports Solid Results and Offers Upbeat Guidance

NII Holdings (NIHD) reported very good 4Q06 results that were inline to slightly ahead of analyst estimates and guidance. Headline numbers, country level results, and subscriber metrics were remarkably close to estimates across the board. This is a consistent pattern for NIHD which I think is a significant positive in the investment story given the perceived volatility of the emerging Latin American markets the company serves.

NIHD also issued 2007 guidance that was very close to current analyst estimates. Another year of mid-30% growth is in the cards. If there is any near-term issue coming out of the 4Q results it would be the forecast for only a 130 basis point increase in EBITDA margins in 2007. Some but not all analysts were looking for more significant margin expansion as the company reaches the end of a big investment cycle to expand its geographic reach in Mexico and Brazil. The margin forecast was accompanied by a higher than expected subscriber growth forecast of 1.2 million. Therefore, the incremental 100,000 subscribers compared to expectations may be the cause of the lesser margin expansion. New customers come on at very low or even negative margins in the initial year. I don’t want to make too big a deal out of this but the margin expansion story ultimately determines the level of free cash flow which will drive long-term shareholder value.

A very important point is that NIHD has a history of beating guidance....

One year ago, the company forecast 800,000 net adds and $654 million in EBITDA in 2006. Guidiance was then raised mid year to 885,000 subscribers and EBITDA of $657 million. Final figures were 934,000 and $671 million. I'd expect a similar results in 2007 with the big upside existing in EBITDA.

In 4Q06, NIHD reported EPS, revenue, and EBITDA of 60 cents, $671 million, and $196 million, respectively. EPS was aided by a one-time benefit to the tax rate. Adjusted EPS would have been right around the 43 cent consensus. Revenues came in $7 million ahead of consensus and EBITDA matched consensus.

At the country and subscriber level, NIHD results also closely mirrored expectations. Net adds of 252,000 were exactly as expected as was the industry leading churn level of 1.5%. ARPU was $59, in line with year ago levels and cost per gross add fell slightly from 2005. Results in NIHD's served markets of Mexico, Brazil, Argentina, and Brazil each came in within a few million dollars of expectations with no variation that creates any concern.

The conference call had a lot of discussion about free cash flow and NIHD's underleveraged balance sheet. NIHD will become a significant free cash flow generator in 2007 to the tune of $375 million. With net debt at just $425 million and free cash flow poised to accelerate sharply again in 2008, analysts were anxious to hear what NIHD's plan were for the balance sheet. This is a very good problem to have, especially for a company serving emerging markets. Management indicated that further investment in current markets, acquisitions of new markets, and return of cash to shareholders would be uses of cash, in that order. Analysts pressed the company as to return of cash given that build out plans won’t come close to consuming free cash flow. I expect to hear more on this topic later this year.

Overall, I think 4Q results, 2007 guidance, and the tone of the conference call were all favorable. On another day, the shares would be responding favorably but the slaughter in emerging markets today is pressuring the stock. I am still relatively new to the NIHD story but I want to stress how competent, careful, and detailed the management team was on the call. NIHD is a great way to play emerging markets growth with reduced risk due to rock solid execution. 2007 and 2008 offer another few years of 30% or greater growth. If the numbers are hit and the market cooperates, NIHD shares can head much higher, possibly to $100 or more by the end of 2007.

Bullish Indiactor For NII Holdings?

One of the comparables I used in my thus far successful purchase of NII Holdings (NIHD) was Millicom International (MICC). NIHD offers wireless telephone service in Mexico, Brazil, Argentina, Peru, and Chile using Nextel's iDEN technology. MICC uses traditional GSM technology in markets it serves in Central and South America, Africa, and Southeast Asia.

What both companies have in common is a focus on emerging markets and very fast growth. Both also have very high margins although NIHD's focus on business customers vs. MICC's focus on prepaid consumers means that ARPU is much higher at NIHD.

The reason I mention this is that MICC rose over $7, up 10%, yesterday after it reported blow out 4Q06 results. NIHD doesn’t report until February 27th but there are enough similarities that MICC's results should be a good sign. Obviously, investors were thinking the same thing yesterday as NIHD tacked on $3, or 4%, yesterday.

NIHD and MICC do not overlap in any country in Central or South America but NIHD's results coming from Guatemala, Honduras, El Salvador, Bolivia, Columbia, and Paraguay indicate that mobile phone markets in these geographies are very healthy. In Central America, MICC reported subscriber growth of 89% and EBITDA growth of 62%, while in South America, MICC saw 65% subscriber growth and EBITDA more than doubled.

NIHD is a compelling story in its own right as I outlined in my initial Long/Short Investor recommendation. MICC's results make me more confident that my investment thesis will be validated on February 27th so despite a 16% jump in NIHD since my initial purchase at the very beginning of January, I am remaining long with growing confidence that my reach target of $100 in 2008 is in the cards.

Why We Got A Buying Opportunity in NII Holdings

NII Holdings (NIHD) rebounded nicely yesterday (and even more today) but I want to expand on some of the reasons the stock sold off since its December peak providing the buying opportunity I had been waiting for since the big move up following the company's presentation at the UBS Conference.

Lehman Brothers was out with a report yesterday addressing some of the recent issues and recommending investors use the weakness to buy the shares. The company also was able to address some of the issues when it presented yesterday afternoon at another Wall Street conference, Citigroup's Entertainment, Media, and Telecom Conference. I listened in on the presentation which was pretty much a repeat of what they said in December. Here is a link to a pdf file including the slides they used at Citigroup. It is an excellent overview if you want to learn more about NIHD:

Download NIHD Presentation

Among the issues troubling the shares and cited by Lehman are the shortfalls at Motorola (MOT) and Sprint Nextel (S) and weakness in emerging markets, especially concerns related to Latin America following Hugo Chavez's moves to nationalize certain industries in Venezuela. As a reminder, NIHD is a major wireless carrier in Mexico, Brazil, Argentina, and Peru using the Nextel iDEN push-to-talk technology.

Lehman argues, and I agree, that the linkage between MOT, S, Chavez, and NIHD is weak....

MOT's shortfall was partially iDEN related but MOT's problem wasn't handset sales to emerging markets. In fact, those sales are part of the problems as unit volumes are surprising to the upside in these countries but margins are getting squeezed by lower ASPs. Problems at S seem numerous but loss of higher ARPU, higher margin Nextel customers are definitely part of the problem. But problems with brand equity in Sprint and Nextel and complications of their merger don’t translate to Latin America. S once was a major shareholder in NIHD but even that is no longer true as ownership is now under 10%. Regarding Chavez, NIHD had been very clear for the past year that it isn’t interested in expanding into Latin American countries with new left-leaning governments. Over 70% of NIHD's EBITDA comes from Mexico and Brazil where recent election left the trend toward Western-style capitalism firmly in place.

2007 should be a big year for NIHD as expansion of its addressable market in Mexico and Brazil through network expansion winds down. This should lead to accelerating subscriber growth with margin expansion resulting in a continuation of the company's 30-50% growth. Given the growth rate, the potential for sustainable growth, and the high quality customer base, management team, and balance sheet, NIHD shares look cheap on any measure that considers both absolute valuation and growth rates. Furthermore, given analyst expectations for 2008, the cash flow multiple looks cheap even if relative growth rates are ignored.

NII Holdings: New Buy Provides Unique Exposure To Emerging Markets Wireless

One of my favorite presentations at December's UBS Media & Communications Conference was from NII Holdings (NIHD). NIHD offers wireless telephone service using Nextel's iDEN standard in Mexico, Brazil, Argentina, and Peru. NIHD has approximately 3.2 million subscribers, primarily serving the business market.

I was interested in buying NIHD as soon as I returned from the conference in early December but the shares spiked higher following the company's well received presentation. The stock finally pulled back to an attractive point the first week of 2007 so I initiated a position across the entire Northlake client base.

Upside Potential Is Significant

NIHD shares trade at a well-deserved premium to other emerging markets wireless service providers due to the company's rapid growth and superior operating metrics in ARPU and churn. Margins are set to expand sharply after a multi-year period of investment to expand the reach of the network wraps up in 2007. At the UBS conference management was very confident that operating results were set to accelerate from already high growth levels. I think this can drive the shares to the high end of their historical valuation range, producing a stock price near $90 on 2007 estimates and $110 on 2008 estimates, or upside of 32% to 62%. I think that kind of upside provides plenty of compensation for the above average risk of operating in emerging markets (the risk is much greater to the stock price than the operating results as a review of the chart during last May's emerging market meltdown indicates)…

Company Overview and Stock Drivers

Almost half of NIHD's 3.2 million subs are in Mexico as is almost 70% of EBITDA. Brazil and Argentina are the next two biggest markets, with Brazil poised to grow more rapidly and move firmly into the #2 position. Peru is a smaller market offering solid growth prospects and good operating statistics. The company has recently announced expansion into Chile.

NIHD is much smaller than other wireless service providers operating in its markets because the company does not target the consumer market. NIHD should be viewed as a niche player due to its focus on business customers attracted by Nextel's proven push-to-talk technology. Wireless penetration rates in NIHD's markets still have plenty of room to grow providing a nice tailwind for the company's growth profile. Furthermore, as the company expands the geographic reach of its network, its target market outgrows the wireless market in each country in which it operates.

Rapid potential growth in NIHD's subscriber base is accompanied by the likelihood of sharply increasing margins. NIHD's margins have remained stable for the last several years as the company has incurred substantial expenses to expand its networks. This process is winding down in the first half of 2007. In addition to less investment spending, the company should begin to see the operating leverage normally associated with network based businesses. Finally, analysts are expecting lower interconnection rates to drive margins and traffic.

NIHD has a very strong financial profile. Consensus EBITDA for 2007 is around $1.1 billion, while 3Q06 net debt was just $550 million. The financial condition is going to grow even stronger as starting in 2007, NIHD should begin to produce significant free cash flow of over $100 million. If long-term growth estimates are reached, free cash flow could approach $1 billion annually within 5 years.

Growth Profile and Stock Valuation

NIHD expects to sustain its 30%+ 3 year CAGR of subscriber growth, revenue, and EBITDA over the next couple of years. Very rapid growth and financial strength has not been lost on investors with NIHD shares up over 50% in 2006. The shares trade at almost twice the EBITDA multiple of other emerging market wireless operators but this has been the case for many years. Investors are rightly paying up for the combination of rapid growth, U.S. style ARPU, and low churn.

With operating results poised to accelerate in 2007 off already high levels, I think the shares can sustain their valuation premium relative to comparable wireless stocks and trade at recent levels of 12-13 times current year EBITDA. Based on 2007 and 2008 estimates, this provides upside to $90-110.

Risks

As with any company focused on emerging markets, risks are high. NIHD faces additional risks because it uses a unique technology that is currently without a path to next generation technology. In September, NIHD signed a supply agreement with Motorola (MOT) extending through 2011, so access to iDEN technology is not a near-term risk. Nevertheless, this is a risk worth monitoring, especially as other operators perfect better push-to-talk technologies on industry standard technology.

Another risk for NIHD is that the company will use its financial strength to expand its footprint to new markets or new wireless technologies. These investments could be dilutive to current shareholder value.

Finally, Sprint Nextel (S) still owns almost 8% of NHID shares. The ownership has dropped sharply since 2002 when it was about 36%. Recent appreciation in the shares could lead Sprint to sell their remaining holdings creating added supply that might depress the NIHD shares.

I think the extremely high visibility of growth for 2007 and 2008 and the substantial upside that comes with it more than compensates for these risks.