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Morningstar | Mexican Growth Slowed During 1Q but Better Times Appear Ahead for America Movil

America Movil reported messy first-quarter results, with accounting changes, currency movements, and one-time items skewing comparisons. It appears wireless revenue growth slowed considerably in Mexico, the firm’s most important market. Wireless customer growth remains solid, though, and management commentary suggests better pricing in the coming months will benefit growth over the balance of 2019. Profitability was also a bright spot. We don’t expect to materially alter our $18 fair value estimate and our narrow moat rating is unchanged.

Wireless service revenue in Mexico increased 5.7% year over year, the slowest pace since early 2017. Customer growth continues to accelerate, and the mix continues to shift toward higher-spending postpaid accounts. However, revenue per customer has stagnated. Last quarter management indicated it was content with Mexican ARPU in the MXN 150 range per month. Adjusting for accounting changes, it looks like ARPU came in at about that level. We were disappointed with management’s comments a quarter ago, but we still expected ARPU to march higher as competitors looked to improve profitability. That view is panning out, as AT&T raised prices in April and Movil followed suit. Management now seems willing to continue moving prices higher. Margins in the Mexican business were roughly flat versus a year-ago despite sizable one-time costs in the quarter. Management remains confident Mexican profitability will improve in 2019.

In Brazil, Movil added nearly 1 million postpaid wireless customers, continuing its streak of strong performance, but the prepaid customer losses more than offset these gains for the third consecutive quarter. Average revenue per customer continues to grow at a double-digit pace, but weakness in the Brazilian real over the past year continues to weigh on revenue in both Mexican peso and U.S. dollar terms. In local currency, Brazilian revenue increased only 1.3% year over year, the best rate since 2015.

Management expects results in Brazil will track closely with the overall economy, a view we think makes sense. In the meantime, Movil is positioning the business to benefit from improved consumer health, rolling out converged fixed-line and wireless offerings and pursuing the acquisition of Nextel Brazil. The acquisition brings a nice chunk of wireless spectrum and reduces the number of competitors in major Brazilian markets from five to four. Management declined to provide synergy expectations tied to the deal, but we would expect sizable financial and strategic benefits. Regulators still have to sign off on the deal, which the firms hope to close by the end of the year.

Colombia, Movil’s third-most important market, was also a bright spot during the quarter. Wireless service revenue grew year over year for the first time since mid-2017, albeit only 0.8%, as pricing improved nicely. Movil also continues to add fixed-line customers in the country, contributing to 8.4% revenue growth in that segment. Here again, though, currency weakness caused revenue to decline in Mexican peso terms. Still, the improvement in local growth is welcome in what has been a tough competitive environment. Margins in the country also ticked up.

Movil fielded numerous questions on its U.S. business during the earnings call, commenting that it is happy with the business and that it expects growth to improve in 2019 as lifeline customers roll off. Management also stated that it is not interested in owning a network in the U.S. but that it would be interested in acquiring additional customers to gain scale. With the Sprint and T-Mobile merger still under consideration, there’s a possibility that regulators could force one of the firms to sell its prepaid business as a regulatory condition. Management declined to address the possibility that it could be interested in selling the business.

We think divesting the U.S. operation could benefit Movil, eliminating a low-margin business that has, in our view, little strategic benefit for the firm. Proceeds from the sale could be used to reduce leverage, as the firm still wants to bring net debt down to 1.5 times EBITDA from 2.0 times currently.